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International Monetary Fund

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.

International Monetary Fund. European Dept.

IMF Country Report No. 21/108

International Monetary Fund. European Dept.
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.
International Monetary Fund. European Dept.

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.

International Monetary Fund. European Dept.

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.

International Monetary Fund. European Dept.

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.

International Monetary Fund. European Dept.

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.