This paper discusses key findings of the assessment of Financial Sector Supervision and Regulation in Andorra. The assessment reveals that bank supervision in Andorra is broadly sound and has improved since the 2002 assessment. Institut Nacional Andorrà de Finances’ (INAF) new charter strengthened its independence and remedial powers. But these could be further strengthened by empowering it to impose all types of sanctions. Developing INAF’s onsite supervisory capacity and clarifying its requests to external auditors will be important for the bank and nonbank financial sectors.
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.
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.