## Principality of Andorra: Staff Concluding Statement of the 2025 Article IV Mission

_IMF News, February 11, 2025_

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## Bibliographic details
- Published: February 11, 2025

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### 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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## References

- [Principality of Andorra and the IMF](https://www.imf.org/en/countries/and)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2025/02/11/andorra-cs-2025_