February 11, 2025
PRESS OFFICER: Camila Perez
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Andorra La Vella – February 11, 2025
The Andorran economy is doing well. This provides a window of opportunity to address substantial long-term challenges. The authorities have consolidated the country’s macro-financial framework and reinforced buffers. However, Andorra’s real GDP per capita—while high in absolute terms—has remained flat over the last 50 years, with growth largely driven by population increases. Going forward, population aging is both an economic and a fiscal concern, and climate change challenges an economic model largely dependent on winter tourism. Ambitious structural reforms are needed to unlock investment and lift productivity.
Economic Outlook
The Andorra economy continues to show resilience and to grow above its potential. Growth in 2024 surprised slightly on the upside, at an estimated 2.1 percent, driven by the service, banking and construction sectors. Inflation is subsiding gradually, reaching 2.6 percent at the end of 2024, despite limited economic slack and a still tight labor market. The current account surplus remains very large, estimated at 15.1 percent of GDP in 2024. The strong performance of banks continued in 2024 supported by high interest margins and increased fees and commissions.
Going forward, GDP is expected to slow to the level of potential growth. Real GDP growth is forecasted at 1.7 percent in 2025 and 1.5 percent from 2027 onwards. Inflation is projected to stabilize at 1.7 percent over the medium term. Short-term risks are balanced: greater uncertainty in the global economy and the potential for adverse shocks such as deepening geoeconomic fragmentation, supply disruptions, recurrent commodity price fluctuations and a reversal of monetary policy loosening are downside risks to growth and inflation. On the upside, Andorra, like other service-oriented economies in Europe, could benefit from stronger demand, and grow faster than projected. Solid buffers mitigate risks.
Challenges are concentrated over the medium-term, as stagnating income growth makes it challenging to address the impact of population aging and climate change. With long life expectancy and low fertility rates, Andorra’s population is expected to age rapidly—removing an engine for GDP growth and creating fiscal liabilities over the long term. Fiscal costs from pensions and healthcare will be substantial. More frequent climate shocks can affect the economic cycle in an economy largely reliant on winter tourism, and structurally warmer temperatures will require extensive adaptation.
Policy priorities
The solid macroeconomic position and the credibility of the policy framework provide Andorra with an opportunity for implementing far-reaching structural reforms. Diversifying the economy to enhance resilience, unlocking investment and lifting productivity to raise income levels, and addressing the costs of aging and climate change should be driving the policy agenda. The recently negotiated EU Association Agreement (EUAA), if approved by referendum, could offer an opportunity to support the reform momentum, but would also bring challenges.
Maintaining a solid fiscal framework given spending pressures over the medium term
Maintaining a disciplined fiscal policy within the fiscal framework is important and will provide room for more public investment. In a microstate that needs fiscal buffers against external shocks, entrenching fiscal space is important. In addition, the credibility of the fiscal framework and the primary surplus provide room for higher public investment to support potential growth and mitigate structural bottlenecks.
Over the medium term, Andorra faces rising spending pressures from aging, as well as a need to adapt to climate change—engaging reforms early is paramount. Staff estimates that by 2050, pension system expenditures will rise by 6.7 percentage points while healthcare expenditures will increase by 2 percentage points. Acting early on pension and healthcare reforms is needed to anticipate and mitigate the fiscal impact of aging.
· Beyond direct policies in the pension and healthcare areas, broader measures would be helpful to buffer the additional long-term fiscal costs of aging. Domestic revenue mobilization and migration policies can help.
Precautionary borrowing and a rapid reduction in public debt provide the authorities with flexibility in managing the debt profile. The authorities are reaping the benefits of an effective debt management strategy that is projected to bring public debt down to 30 percent of GDP by 2026, that lengthened its maturity to 6.3 years and that keeps public debt service low. The authorities should continue to monitor market conditions for an upcoming debt maturity of €500 million public bonds in 2027, including for further diversifying debt and extending its maturity to decrease rollover risks and mitigate consequences from potential increases in interest rates.
Consolidating banking performance in a changing environment
Strengthening further the resilience of the banking system during periods of high profitability is appropriate. The banking sector displays solid fundamentals, with large capital and liquidity buffers. However, given the large size of the banking sector, the supervisor should remain vigilant. Available supervisory tools should complement each other, including by supporting the lender of last resort facility introduced in 2022 by continued close supervision and a well-designed resolution framework to ensure that critical problems are identified and addressed early. The activation of a countercyclical capital buffer in 2024 was timely to increase banking system resilience during high bank profitability.
The changing financial landscape, notably with the continued international expansion of banks and a possible EUAA, brings opportunities and challenges for Andorran banks. Banks have been growing in the EU where they run independent subsidiaries focused on private banking services, and the EUAA would facilitate this expansion, notably in the asset management business. Domestically, the EUAA has the potential to create a more dynamic domestic market but also to open Andorra to greater competition. The authorities should work closely with banks to prepare for the transition and safeguard financial stability.
Ambitious structural reforms to unlock investment and lift productivity, support the diversification of the economy and help mitigate climate change.
A comprehensive set of structural measures is important and should focus on the following:
The EUAA could provide further momentum for reforms towards diversification, unlock investment, and raise productivity in Andorra, but is not without its own challenges. The agreement signals a strong commitment to deeper integration with the EU and to reinforce Andorran institutions in their coherence with EU standards. Empirical evidence on the benefits of EU membership provides useful lessons for EU association. It suggests that while the impact can be significant and positive, it builds up over time, and is conditional on well-designed domestic reforms during the accession period. While the impact varies with country-specific circumstances, it materializes through a few channels: structural reforms in the period preceding accession/association, greater capital accumulation, notably FDI, and higher productivity. In Andorra, room for increasing investment and productivity is substantial. Transition periods for key sectors such as telecom and banking mitigate the risks of disruption and fiscal space can cover transition costs. Preparedness is essential to realize the benefits of association, and reduce potential downsides, such as greater regional competition.
The climate adaptation strategy needs to be accelerated given the macrocriticality of global warming for Andorra. Because of its higher altitude, Andorra is less exposed than other winter tourism locations in the region and should use this window of opportunity to enact needed policies, support the development of higher value-added service sectors and diversify away from winter tourism. The authorities should expedite the development and execution of a climate adaptation strategy.
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The mission thanks the authorities and all our counterparts for a constructive and candid policy dialogue, for engaging in a productive and transparent collaboration, and for their hospitality during the official visit of the IMF to Andorra.
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Andorra: Selected Social and Economic Indicators |
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I. Social Indicators |
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Population (2023) |
85101 |
Population at risk of poverty (percent, 2020) |
13 |
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Per capita income (2023, euros) |
40511 |
Human Development Index Rank (2021) |
40 (out of 189) |
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Gini Index (2020) |
32 |
Life expectancy at birth (2024) |
83.9 |
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II. Economic Indicators |
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Projections |
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2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
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NATIONAL ACCOUNTS AND PRICES |
(annual change, percent, unless otherwise indicated) |
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Real GDP |
9.6 |
2.6 |
2.1 |
1.7 |
1.6 |
1.5 |
1.5 |
1.5 |
1.5 |
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Nominal GDP |
14.2 |
9.0 |
5.0 |
3.7 |
3.4 |
3.3 |
3.2 |
3.2 |
3.2 |
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GDP deflator |
4.2 |
6.3 |
2.9 |
1.9 |
1.8 |
1.7 |
1.7 |
1.7 |
1.7 |
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(contribution to nominal GDP growth, percentage points) |
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Consumption |
6.5 |
7.0 |
3.6 |
2.5 |
2.5 |
2.5 |
2.5 |
2.4 |
2.4 |
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Private |
6.2 |
3.5 |
1.7 |
1.5 |
1.5 |
1.5 |
1.5 |
1.4 |
1.4 |
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Public |
0.3 |
3.4 |
1.9 |
1.0 |
1.0 |
1.0 |
1.0 |
1.0 |
1.0 |
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Investment |
6.8 |
-2.2 |
0.9 |
0.5 |
0.6 |
0.3 |
0.3 |
0.4 |
0.5 |
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Private 1/ |
6.4 |
-3.1 |
0.2 |
0.0 |
0.4 |
0.1 |
0.1 |
0.2 |
0.3 |
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Public |
0.4 |
0.9 |
0.7 |
0.5 |
0.2 |
0.2 |
0.2 |
0.2 |
0.2 |
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Net exports of goods and services |
0.9 |
4.3 |
0.7 |
0.6 |
0.4 |
0.4 |
0.4 |
0.4 |
0.4 |
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Exports |
18.8 |
10.4 |
4.2 |
3.3 |
2.8 |
2.8 |
2.9 |
2.9 |
2.8 |
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Imports |
18.0 |
6.1 |
3.5 |
2.7 |
2.5 |
2.4 |
2.5 |
2.5 |
2.4 |
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Prices |
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Inflation (percent, period average) |
6.2 |
5.6 |
3.1 |
2.2 |
1.8 |
1.7 |
1.7 |
1.7 |
1.7 |
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Inflation (percent, end of period) |
7.2 |
4.6 |
2.6 |
2.0 |
1.7 |
1.7 |
1.7 |
1.7 |
1.7 |
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Unemployment rate (percent) |
2.1 |
1.6 |
1.6 |
1.6 |
1.8 |
1.8 |
1.9 |
2.0 |
2.0 |
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EXTERNAL SECTOR |
(percent of GDP, unless otherwise indicated) |
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Current account |
11.6 |
14.2 |
15.1 |
17.0 |
17.0 |
17.0 |
17.0 |
17.0 |
17.0 |
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Balance on goods and services |
8.8 |
12.0 |
12.0 |
12.2 |
12.1 |
12.1 |
12.1 |
12.1 |
12.1 |
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Exports of goods and services |
80.9 |
83.7 |
83.7 |
83.9 |
83.8 |
83.9 |
84.1 |
84.2 |
84.3 |
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Imports of goods and services |
72.2 |
71.8 |
71.6 |
71.7 |
71.7 |
71.8 |
71.9 |
72.1 |
72.2 |
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Primary income, net |
4.3 |
3.5 |
4.3 |
6.1 |
6.1 |
6.1 |
6.1 |
6.1 |
6.1 |
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Secondary income, net |
-1.4 |
-1.3 |
-1.3 |
-1.3 |
-1.3 |
-1.3 |
-1.3 |
-1.3 |
-1.3 |
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Capital account |
0.0 |
-0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
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Financial account |
12.7 |
13.5 |
15.1 |
17.0 |
17.0 |
17.0 |
17.0 |
17.0 |
17.0 |
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Errors and omissions |
1.1 |
-0.6 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
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Gross international reserves (millions of euros) 2/ |
338.4 |
338.7 |
399.0 |
399.0 |
399.0 |
399.0 |
399.0 |
399.0 |
399.0 |
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FISCAL SECTOR |
(percent of GDP, unless otherwise indicated) |
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General Government 3/ |
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Revenue |
39.7 |
38.0 |
37.9 |
37.8 |
37.7 |
37.8 |
37.8 |
37.7 |
37.8 |
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Expenditure |
34.9 |
35.9 |
36.5 |
36.7 |
36.6 |
36.9 |
36.9 |
37.0 |
37.0 |
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Interest |
0.7 |
0.6 |
0.6 |
0.6 |
0.6 |
0.8 |
0.8 |
0.8 |
0.8 |
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Primary balance |
5.6 |
2.7 |
2.0 |
1.7 |
1.6 |
1.6 |
1.7 |
1.6 |
1.6 |
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Net lending/borrowing (overall balance) |
4.8 |
2.1 |
1.5 |
1.1 |
1.1 |
0.8 |
0.9 |
0.8 |
0.8 |
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Public debt |
38.9 |
35.5 |
33.7 |
32.5 |
31.5 |
30.5 |
30.0 |
29.5 |
29.0 |
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Central Government 4/ |
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Revenue |
21.7 |
19.8 |
21.3 |
20.8 |
20.8 |
20.8 |
20.8 |
20.8 |
20.9 |
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Expenditure |
18.7 |
19.1 |
20.4 |
20.5 |
20.5 |
20.6 |
20.7 |
20.6 |
20.7 |
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Interest |
0.7 |
0.5 |
0.5 |
0.5 |
0.5 |
0.7 |
0.7 |
0.7 |
0.7 |
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Primary balance |
3.6 |
1.2 |
1.4 |
0.8 |
0.8 |
0.9 |
0.8 |
0.9 |
0.9 |
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Net lending/borrowing (overall balance) |
2.9 |
0.7 |
0.9 |
0.3 |
0.3 |
0.2 |
0.1 |
0.2 |
0.2 |
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Public debt |
37.1 |
34.0 |
32.3 |
31.2 |
30.1 |
29.2 |
28.7 |
28.3 |
27.9 |
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BANKING SECTOR5 / |
(percent, unless otherwise indicated) |
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Regulatory capital to risk-weighted assets |
20.3 |
21.7 |
21.2 |
… |
… |
… |
… |
… |
… |
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Nonperforming loans to total gross loans |
3.3 |
2.2 |
2.1 |
… |
… |
… |
… |
… |
… |
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Credit to nonfinancial private sector |
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Level (percent of GDP) |
116.4 |
101.3 |
94.5 |
… |
… |
… |
… |
… |
… |
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Corporates |
61.8 |
55.1 |
51.1 |
… |
… |
… |
… |
… |
… |
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Households |
54.6 |
46.2 |
43.4 |
… |
… |
… |
… |
… |
… |
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Growth (nominal) |
-1.7 |
-5.2 |
-2.0 |
… |
… |
… |
… |
… |
… |
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Corporates |
2.6 |
-2.8 |
-2.5 |
… |
… |
… |
… |
… |
… |
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Households |
-6.1 |
-7.8 |
-1.3 |
… |
… |
… |
… |
… |
… |
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Credit to public sector |
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Level (percent of GDP) |
2.2 |
1.8 |
1.5 |
… |
… |
… |
… |
… |
… |
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Growth (nominal) |
-8.4 |
-10.0 |
-13.0 |
… |
… |
… |
… |
… |
… |
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Memorandum items |
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Exchange rate (€/USD, period average) 6/ |
0.95 |
0.92 |
0.92 |
0.97 |
0.97 |
0.97 |
0.97 |
0.97 |
0.97 |
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Nominal GDP (millions of euros) |
3,210 |
3,501 |
3,676 |
3,811 |
3,942 |
4,070 |
4,202 |
4,338 |
4,478 |
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Sources: Andorran authorities, Eurostat, and IMF staff calculations. |
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1/ The contribution of private investment is derived as a residual and includes investments of state-owned enterprises. |
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2/ The increase of gross international reserves in 2022 is due to €100 million deposited at the Bank of Spain, €40 million at the Banque de France, and €60 million at the Nederlandsche Bank as gross international reserves. In 2024, additional €60 million reserves were accounted, mainly deposited at the Bank of Spain. |
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3/ The general government comprises the central government, local governments, and the social security fund. |
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4/ The central government comprises Govern d'Andorra, as well as nonmarket, nonprofit institutional units. |
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5/ 2024 data corresponds to 2024Q3. |
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6/ The table reports the exchange rate €/USD because Andorra is a euroized economy. |
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