IMF Completes 2025 Article IV Review for Andorra
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Principality of Andorra. The Board considered and endorsed the staff appraisal on a lapse of time basis.
The Andorra economy continues to be resilient and to grow above its long-term potential. Growth in 2024 surprised on the upside at 2.1 percent, driven by the service, banking and construction sectors. Inflation is subsiding gradually, reaching 2.6 percent at the end of 2024, despite limited economic slack and a tight labor market. The current account surplus remains very large, estimated at 15.1 percent of GDP in 2024. The strong performance of banks continued in 2024 supported by high interest margins and increased fees and commissions.
Going forward, GDP is expected to converge and stabilize at its long-term potential of 1.5 percent. Inflation is projected to decline to 2 percent by the end of 2025, in line with price developments in neighboring countries. In the short term, risks to the outlook are balanced. Downside risks are largely related to uncertainty in the global economy. On the upside, Andorra, like other service-oriented economies in Europe, could benefit from stronger demand, and grow faster than projected. Solid buffers mitigate risks, notably a strong fiscal position, a large current account surplus, and well-capitalized and liquid banks.
Challenges are concentrated over the medium term, as stagnating GDP per capita makes it challenging to address the impact of population aging and climate change. Bottlenecks in the housing and labor markets could have a negative impact on growth. However, greater economic diversification, higher investment and productivity would support growth over the medium term. The adoption of the EU Association Agreement could offer an opportunity to support the reform momentum and contribute to diversification, but would also bring challenges.
Executive Board Assessment [2]
The Andorra economy continues to show resilience and to grow above its potential. Growth in 2024 surprised slightly on the upside, at an estimated 2.1 percent, driven by the service, banking and construction sectors. Inflation is subsiding gradually, having reached 2.6 percent at the end of 2024, despite limited economic slack and a still tight labor market. The current account surplus remains very large, estimated at 15.1 percent of GDP in 2024, an external position that is assessed to be stronger than implied by fundamentals and desirable policies, supported by the services sector and net income. The strong performance of banks continued in 2024 supported by high interest margins and increased fees and commissions. Over the medium term, GDP is expected to slow to the level of potential growth at around 1.5 percent. Short-term risks are balanced: greater uncertainty in the global economy on the downside and stronger demand for the services sector on the upside. Solid buffers mitigate risks.
Challenges are arising over the medium-term, as stagnating GDP per capita lowers growth and makes it challenging to address the impact of population aging and climate change. With long life expectancy and low fertility rates, Andorra’s population is expected to age rapidly—removing an engine for GDP growth and creating fiscal liabilities over the long term. Fiscal costs from pensions and healthcare will be substantial. More frequent climate shocks can affect the economic cycle in an economy largely reliant on winter tourism, and structurally warmer temperatures will require extensive adaptation.
The authorities should maintain a disciplined fiscal policy to protect fiscal space and provide room for needed public investment. In the absence of monetary policy tools, maintaining fiscal policy space and reducing public sector liabilities is warranted for a microstate vulnerable to external shocks. The 2025 budget finds a welcome balance between maintaining a conservative fiscal stance while building on the authorities’ structural priorities, with a focus on housing. The fiscal framework provides room for higher public spending focused on the structural needs of the economy, including social and affordable housing, upskilling the workforce and addressing labor shortages, connectivity to support economic diversification, and investments to lift potential growth.
Early fiscal reform is paramount. Pension expenditures will increase by 6.7 percentage points while healthcare expenditures will increase by 2 percentage points by 20250. Concluding the pension reform in an expeditious and comprehensive manner is needed to ensure the sustainability of the social security fund in the long run. A reform of the healthcare system should aim to contain long-term costs while raising healthcare revenues, drawing on the experience from other advanced economies. Fiscal space will be increasingly needed to buffer the negative impact of climate shocks.
During periods of high profitability, the supervisor should continue to strengthen the resilience of the banking system. The changing financial landscape, notably with the continued international expansion of banks and a possible EUAA, brings opportunities and challenges for Andorran banks. While the banking sector displays solid fundamentals, the supervisor should remain vigilant given the large size of the banking sector. Available supervisory tools should complement each other, including by supporting the lender of last resort facility introduced in 2022 and the countercyclical capital buffer activated in 2024.
Ambitious structural reforms can help unlock investment and lift productivity, support the diversification of the economy, and help mitigate climate change. A comprehensive set of reforms should first address frictions, notably labor and housing shortages. To tackle housing affordability, it is essential for the government to focus on well-targeted measures that avoid distortions in the housing market, restore proper market incentives to invest in rental property development, and ensure consistency with other economic priorities, such as attracting foreign investment. Establishing a business environment conducive to higher investment is key, notably by reducing administrative rigidities associated with doing business in Andorra. Finally, the authorities should support the development of higher value-added services and sectors, including the digital economy. With limited space for manufacturing, Andorra can look at the experience of peer countries that have successfully diversified towards the digital economy and experienced fast income growth. The climate adaptation strategy also needs to be accelerated given the macrocriticality of rising temperatures for Andorra’s tourism sector.
The EUAA could provide further momentum for reforms towards diversification, unlocking investment, and raising productivity in Andorra but is not without challenges. The agreement signals a strong commitment to deeper integration with the EU and to strengthen Andorran institutions in their coherence with EU standards. Previous experience suggests that Andorra will maximize the benefits of association with well-designed domestic reforms during the accession period, which could support greater capital accumulation, notably FDI, and higher productivity. Transition periods for key sectors such as telecom and banking mitigate the risks of disruption and fiscal space can cover transition costs. Preparedness is essential to realize the benefits of association and reduce potential downsides, such as greater regional competition.Directors commended Andorra’s resilience to external headwinds and the authorities’ sound macroeconomic management, that allowed to rebuild solid buffers. While risks to the outlook are balanced, Directors noted challenges stemming from persistently high inflation, a tight labor market, and housing affordability. They emphasized the importance of preserving prudent policies and advancing structural reforms to promote economic diversification and lift medium-term growth.
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions
https://www.imf.org/en/News/Articles/2025/04/09/pr25096-andorra-imf-concludes-2025-article-iv-consultation-with-the-principality-of-andorra