Principality of Andorra: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, February 11, 2025
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- Published: February 11, 2025
Overview
- The Andorran economy is doing well, creating a window to address substantial long-term challenges.
- Authorities have consolidated the macro-financial framework and reinforced buffers.
- Real GDP per capita has remained flat over the last 50 years, with growth largely driven by population increases.
- Population aging and climate change present key economic and fiscal concerns; ambitious structural reforms are needed to unlock investment and lift productivity.
Economic outlook and risks
- 2024 growth: "2.1 percent", driven by the service, banking and construction sectors.
- Inflation: "2.6 percent" at end-2024.
- Current account surplus: "15.1 percent of GDP" in 2024.
- Bank performance in 2024: supported by high interest margins and increased fees and commissions.
- Forecasts:
- Real GDP growth: "1.7 percent" in 2025 and "1.5 percent" from 2027 onwards.
- Inflation: projected to stabilize at "1.7 percent" over the medium term.
- Short-term risks (downside): greater global uncertainty, deepening geoeconomic fragmentation, supply disruptions, recurrent commodity price fluctuations, reversal of monetary policy loosening.
- Upside: stronger demand for service-oriented economies in Europe could lead to faster growth than projected.
- Solid buffers mitigate risks.
Medium-term structural challenges
- Demographics:
- Andorra expected to age rapidly due to long life expectancy and low fertility rates, removing an engine for GDP growth and creating fiscal liabilities.
- Fiscal cost estimates to 2050:
- Pension system expenditures will rise by "6.7 percentage points".
- Healthcare expenditures will increase by "2 percentage points".
- Climate change:
- More frequent climate shocks can affect the economic cycle in an economy largely reliant on winter tourism.
- Structurally warmer temperatures will require extensive adaptation.
Policy priorities and recommendations
- Overarching priority: use the solid macroeconomic position and credible policy framework to implement far-reaching structural reforms to diversify the economy, unlock investment, lift productivity, and address aging and climate change.
- EU Association Agreement (EUAA):
- If approved by referendum, could support reform momentum and bring challenges; preparedness is essential.
- Fiscal policy:
- Maintain disciplined fiscal policy within the fiscal framework to provide room for public investment.
- The 2025 budget:
- Foresees a deficit of "0.9 percent of GDP".
- Staff forecasts a small surplus of about "0.3 percent of GDP" due to past practice of adjusting expenditures with revenues.
- Fiscal framework limits: overall deficit limit of "1 percent of GDP" and central government debt ceiling of "40 percent of GDP".
- Room exists for higher public spending targeted to growth-enhancing investment: social and affordable housing, upskilling the workforce and addressing labor shortages, connectivity to support economic diversification, and investments to lift potential growth.
- Under-execution of budgeted public investment is customary; delivering on investment plans should be a policy objective.
- Pension and healthcare reforms:
- Pension reform is overdue; options include increasing contribution rates, reducing conversion rates, and increasing the retirement age.
- Healthcare reform should aim to contain long-term costs while raising healthcare revenues; potential measures in 4 areas: (i) enhance cost efficiency, (ii) strengthen preventive care, (iii) increase revenues for healthcare while preserving equity, and (iv) improve governance.
- The National Pact should continue to strengthen the healthcare system.
- Broader measures:
- Domestic revenue mobilization and migration policies can help buffer long-term fiscal costs of aging.
- Climate and fiscal space:
- Public investment needs to increase to meet climate mitigation targets and support private sector adaptation.
- Precautionary borrowing and rapid reduction in public debt provide flexibility.
- Debt management achievements: projected public debt down to "30 percent of GDP" by 2026; maturity lengthened to "6.3 years"; public debt service remains low.
- Authorities should monitor market conditions for an upcoming debt maturity of "€500 million" public bonds in 2027 and consider further diversifying debt and extending maturity to decrease rollover risks and mitigate interest rate risk.
Banking sector and financial stability
- Banking fundamentals: large capital and liquidity buffers; sector displays solid fundamentals.
- Supervisory recommendations:
- Remain vigilant given the large size of the banking sector.
- Use available supervisory tools to complement each other, support the lender of last resort facility introduced in 2022 with continued close supervision, and maintain a well-designed resolution framework.
- Activation of a countercyclical capital buffer in 2024 was timely.
- International expansion and EUAA implications:
- Banks have been expanding in the EU with independent subsidiaries focused on private banking.
- The EUAA would facilitate expansion, notably in asset management, and could create a more dynamic domestic market but also increase competition.
- Authorities should work closely with banks to prepare for the transition and safeguard financial stability.
Structural reforms to unlock investment and raise productivity
- Priority reform areas:
- Address frictions, notably labor and housing shortages:
- Public investment in education and well-designed immigration policies to improve knowledge capital and raise labor productivity.
- Recent housing measures: extension of existing rental contracts; creation of a public affordable housing park; tax incentives for owners offering affordable housing; suspension of tourist accommodation licenses; fees on empty houses; fees on real estate purchases by foreigners.
- Authorities should aim for market-based incentives for affordable housing while minimizing distortions.
- Create a business environment conducive to higher investment:
- Reduce administrative rigidities, promote access to financing, implement measures to attract and retain talent.
- Support development of higher value-added sectors, including the digital economy:
- Limited space for manufacturing implies focusing on digital economy; government policies include the "2022 Law on the digital economy", entrepreneurship, and innovation and the "Digitalization Strategy 2020-2030".
- EUAA and association benefits:
- Association signals commitment to deeper integration and institutional reinforcement with EU standards.
- Empirical evidence suggests benefits build up over time and depend on well-designed domestic reforms during the accession/association period, materializing via structural reforms, greater capital accumulation (notably FDI), and higher productivity.
- Transition periods for sectors such as telecom and banking mitigate disruption risks; fiscal space can cover transition costs.
- Preparedness reduces potential downsides like greater regional competition.
- Climate adaptation:
- Andorra's higher altitude makes it less exposed than other winter tourism locations; accelerate climate adaptation strategy to enact policies, support higher value-added services and diversify away from winter tourism.
Selected social and economic indicators (highlights)
- I. Social indicators
- Population (2023): "85101"
- Population at risk of poverty (percent, 2020): "13"
- Per capita income (2023, euros): "40511"
- Human Development Index Rank (2021): "40 (out of 189)"
- Gini Index (2020): "32"
- Life expectancy at birth (2024): "83.9"
- II. Economic indicators — selected figures and projections
- Real GDP annual change (percent): "2.1" in 2024; "1.7" in 2025; "1.6" in 2026; "1.5" in 2027.
- Nominal GDP annual change (percent): "5.0" in 2024; "3.7" in 2025; "3.4" in 2026; "3.3" in 2027; "3.2" in 2028.
- GDP deflator (percent): "2.9" in 2024; "1.9" in 2025; "1.8" in 2026.
- Inflation (percent, period average): "2.2" in 2024.
- Inflation (percent, end of period): "2.0" in 2024.
- Current account (percent of GDP): "11.6" in 2022; "15.1" in 2023; "17.0" in 2024.
- Exports of goods and services (percent of GDP): "80.9" in 2022; "83.7" in 2023; "83.8" in 2024; "84.1" in 2025.
- Imports of goods and services (percent of GDP): "72.2" in 2022; "71.8" in 2023; "71.6" in 2024; "71.7" in 2025.
- Gross international reserves (millions of euros): "338.4" in 2022; "338.7" in 2023; "399.0" in 2024.
- General government revenue (percent of GDP): "39.7" in 2022; "38.0" in 2023; "37.9" in 2024.
- General government expenditure (percent of GDP): "34.9" in 2022; "35.9" in 2023; "36.5" in 2024.
- Public debt (percent of GDP): "38.9" in 2022; "35.5" in 2023; "33.7" in 2024; projected "30.0" in 2028.
- Banking sector indicators
- Regulatory capital to risk-weighted assets: "20.3" in 2022; "21.2" in 2023.
- Credit to nonfinancial private sector (level, percent of GDP): "116.4" in 2022; "101.3" in 2023; "94.5" in 2024.
- Credit to corporates (percent of GDP): "61.8" in 2022; "55.1" in 2023; "51.1" in 2024.
- Credit to households (percent of GDP): "54.6" in 2022; "46.2" in 2023; "43.4" in 2024.
- Growth (nominal) of credit to nonfinancial private sector: "-1.7" in 2022; "-5.2" in 2023; "-2.0" in 2024.
- Memorandum items
- Exchange rate (€/USD, period average): "0.95" in 2022; "0.92" in 2023; "0.97" in 2024.
- Nominal GDP (millions of euros): "3,210" in 2022; "3,501" in 2023; "3,676" in 2024; "3,811" in 2025; "3,942" in 2026; "4,070" in 2027.
Principality of Andorra: Staff Concluding Statement of the 2025 Article IV Mission
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- Press Release-English