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Source: IMF – News in English

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation yu1sch with the Principality of Andorra.

The Andorra economy is showing resilience and is growing slightly above its long-term potential despite external headwinds. Growth is estimated at 2.3 percent in 2023, driven by the service sector and a record number of visitors. With limited economic slack, the labor market is tight with almost no unemployment (1.2 percent at 2023Q3), resulting in significant wage pressures. Inflation remained high in 2023, at 5.6 percent, driven by second-round effects from wage increases and generalized price pressure in services and imported goods. Despite a shortage in affordable housing, a substantial increase in foreign residents helped match high labor demand.

Going forward, GDP is expected to slow to its lower long-term potential, estimated at 1.5 percent. Real GDP growth is forecasted at 1.8 percent in 2024 and at 1.5 percent from 2025 onwards, comparable to average growth in the euro area. Inflation is projected to subsidize from 4.3 percent in 2024 to 2 percent only by end-2025, in line with price developments in neighboring countries and domestic second-round effects. Risks to the outlook are balanced, though subject to substantial uncertainty and bottlenecks. Downside risks include a slower than expected global growth, more persistent inflation, and tighter for longer monetary policy in the region. Emerging fault lines and structural bottlenecks—as housing affordability issues, labor shortages, and climate change—cloud the medium-term outlook. On the upside, greater than expected regional growth and lower inflation would increase tourist flows and investments, while the adoption of the EU Association Agreement would open up new markets over the medium-term. Solid macroeconomic buffers serve as buffers to mitigate downside risks should they materialize.

Executive Board Assessmentyu2sch

Executive Directors commended Andorra’s resilience to external headwinds and the authorities’ sound macroeconomic management, that allowed to rebuild solid buffers. While the risks to the outlook are balanced, Directors noted challenges stemming from persistently high inflation, a tight labor market, and housing affordability. They emphasize the importance of preserving prudent policies and advancing structural reforms to promote economic diversification and lift medium‑term growth.

Directors welcomed the authorities’ commitment to fiscal prudence which together with an effective fiscal framework and proactive debt management strategy, have enabled Andorra to restore fiscal space and reduce debt. They agreed that the fiscal stance should remain tight to support disinflationary efforts and further strengthen buffers. Directors concurred that channeling available fiscal space toward higher infrastructure and affordable housing would help structural bottlenecks. They also encouraged the authorities to pursue healthcare reform and build consensus to implement needed pension reforms given population aging.

Directors welcomed the strength of Andorra’s financial system. They emphasized that continued monitoring of risks is needed given the large size of banks and their international exposure. They commended the introduction of the lender of last resort facility and encouraged further strengthening the resolution framework. Directors agreed that ensuring that the Andorran Financial Authority is autonomous and fully resourced is key. They welcomed the recently negotiated EU Association Agreement and encouraged the authorities to ensure its smooth implementation once adopted.

Directors emphasized the importance of removing structural bottlenecks to boost growth and diversify the economy, and noted the opportunities stemming from the EU Association Agreement. They welcomed the priority given to improving housing affordability and addressing potential labor shortages. Noting the progress made, Directors encouraged continued efforts in governance, anticorruption and AML/CFT frameworks, and in closing data gaps, with IMF technical assistance. They also encouraged enhancing digitalization and accelerating climate change adaptation efforts.


EDITOR’S NOTE: This article is a translation. Apologies should the grammar and or sentence structure not be perfect.

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