Andorra, the IMF’s newest member since October 2020, participated in its first Article IV consultation with a commitment to further enhance transparency. Tourism and banking-related services dominate economic activity in the euroized economy. The country enjoys long-standing political stability, a good track-record of fiscal discipline, a gender-balanced work force, and internationally competitive ski resorts. The authorities are managing the pandemic well with universal testing and expanded hospital capacity that kept fatality rates very low despite high case-loads. The testing strategy helped Andorra implement more targeted internal restrictions than in neighboring countries. At the same time, emergency fiscal measures stabilized real incomes and supported firms.
1. The Principality of Andorra, the IMF’s newest member since October 2020, participated in its first Article IV consultation. The authorities are committed to further enhance transparency as they integrate into the international financial community. A coalition government took office in April 2019 with Prime Minister Xavier Espot Zamora from the Democrats for Andorra at the helm. The country enjoys political stability and has a good track-record of fiscal discipline, a gender-balanced work force, and ski resorts not dependent on air travel. The authorities successfully tested the appetite of foreign investors through successful private debt placements in 2020 and issued its first public international bond in late April 2021.
The authorities have just started producing Balance of Payments data with technical assistance from the IMF’s Statistics Department. Preliminary compilation shows that the current account surplus was 18 percent of GDP in 2019 and could have moderated in 2020. While a current account norm is hard to establish, the current account surpluses over the medium-term are appropriate in a euroized country without official international reserves. Analyses of various real exchange rates—including a new “1-week cost of skiing vacation” index—suggest that Andorra fares well in external competitiveness.
Building a stock of international reserve assets for precautionary purposes to cushion against balance of payments risks is especially important for a very open euroized economy. Moreover, Andorra does not have a lender of last resort for its large banking sector with sizeable nonresident deposits. Its reserve assets are currently limited to the reserve tranche position and the SDR holdings at the Fund, which amount to 2 percent of GDP. IMF staff estimate that the government’s liquidity needs are €334 million, equivalent to 12 percent of GDP, assuming that the banks have enough high-quality liquid assets to cover their liquidity needs. The liquidity gap of the government is, thus, 10 percent of GDP, but could be larger if the banking sector has one.
Boosting public investment would catalyze the post-pandemic recovery by fostering employment and economic activity and facilitating the transformation toward more resilient and greener economies. As the focus shifts toward securing an economic recovery, Andorra should aim to reverse the declining public investment trend by building on the already well-developed sectoral strategies to scale-up and fast track some of the planned investments. The near-term focus could be on reassessing implementation of the existing pipeline of projects, advancing digital transformation, and diversifying the tourism sector. In the medium-term, adapting to climate change could include artificial snowmaking to help keep ski resorts remain open during warmer winters, and advancing the energy transition initiatives. Analysis shows that the real GDP level could be 3 to 6 percent higher in the medium-term, compared to staff’s baseline projections, with a faster return to the precrisis unemployment rate.
On January 3, 2020, the Principality of Andorra applied for Fund membership. Ten and a half months later, on October 16, 2020 Andorra became the 190th member of the Fund. Five months after that, Andorra had its first Article IV mission. The Andorran authorities want to express their gratitude to Mission Chief Ms. Srobona Mitra and her team, as well as all involved departments, for having steered the authorities through this momentous period with highly valuable policy advice. They agree with the trust of the staff report and its Selected Issues Paper. They want to thank staff for having taken the time to meet with a wide range of public and private stakeholders to gain an in-depth understanding of the Principality. Finally, after many virtual meetings, the authorities are eager to meet the IMF team in person.