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April 8, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC: An International Monetary Fund (IMF) mission, led by Ms. Srobona Mitra, conducted virtual discussions during March 19 ‒ April 8 in the context of the 2021 Article IV consultation. [1] At the end of the visit, the mission issued the following statement:

The Principality of 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 this 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 managed the pandemic well with universal testing and expanded hospital capacity that kept fatality rates very low. This strategy helped Andorra implement more targeted internal restrictions than the neighboring countries. At the same time, emergency fiscal measures stabilized real incomes and supported firms. The authorities are highly engaged in transitioning to a green and digitalized economy and more diversified tourism services. They are negotiating an Association Agreement with the European Union (EU), having transposed almost all the financial sector regulations in the EU as part of the Monetary Agreement. The authorities successfully started producing balance of payments data, in record time, working closely with the IMF.

The pandemic has taken a considerable economic toll and policy discussions focused on securing a lasting recovery. Emergency fiscal support should remain in place until a recovery has set in and a sufficient share of the population have been vaccinated in both Andorra and the region. Increasing public investment, and diversifying government funding sources, could contribute to higher long-term growth while maintaining debt at manageable levels. The fiscal authorities would also need to build up international reserves gradually. In the financial sector, bank capital appears adequate to absorb the pandemic shock but the full impact of the crisis should be carefully evaluated as the policy support measures expire. In the medium-term, bank capital buffers should be assessed in light of risks associated with large domestic exposures to a few clients, related party lending, and a sizeable nonresident deposit base. Building on significant efforts over the last few years, further improving the effectiveness of anti-money laundering supervision would strengthen financial stability. Disseminating official statistics according to international standards will enhance transparency and aid surveillance.

Economic Outlook

Andorra has been significantly impacted by the pandemic, but the health crisis was managed well with universal testing and revamped hospital capacity. Tourism and domestic services fell with the stringency of containment measures in the first half of 2020 but rebounded strongly during the summer with the arrival of tourists and a temporary ease of stringency. With French and Spanish borders closed until recently, especially during the height of the ski season in the first quarter of 2021, hotels and ski resorts have already lost a major share of their annual revenue. In comparison to neighboring regions though, universal testing might have enabled more targeted containment measures and early detection of cases with associated quarantine requirements, helping save lives and livelihoods. On the health front, despite the very high prevalence of COVID-19 cases per capita, fatality rates are among the lowest in the world as hospital capacity and protective equipment were quickly scaled up in response to the pandemic. So far, the pace of vaccination has been comparable to that of the EU countries facing similar problems of supply. However, vaccine doses for almost half the population from the COVAX facility arrived last week. And, the national vaccination plan in place will allow for a swift administration of the doses.

The authorities responded with mitigating fiscal measures that limited the adverse impact on the economy. Expenditure measures worth 2.4 percent of GDP and revenue measures worth 0.4 percent of GDP included healthcare spending, rent and wage support for firms—including through short-term work schemes—and expanded unemployment benefits for households. In addition, government guarantees worth 9 percent of GDP were made available for bank loans to liquidity-strapped companies. These measures contained the rise in the unemployment rate—the level of which remains among the lowest in the region—stabilized real incomes of households, and helped cover operational costs of firms preventing business closures. In addition, moratoria on debt service and insolvency kept a lid on nonperforming loans and firm insolvencies.

Real GDP growth is projected to rebound this year, amid huge uncertainty, with risks tilted to the downside. Economic activity is estimated to have contracted by 11.8 percent in 2020 and is projected to recover by 5.8 percent in 2021, returning to its pre-crisis level by 2023. Risks to the outlook are significant. Slower than planned vaccination efforts in Andorra and neighboring countries, partly due to a limited supply of vaccines worldwide, could entail protracted lockdowns in 2021 if the infection waves are not under control. Bank capitalization, while adequate in the baseline scenario, could come under pressure with potential loan-losses when fiscal and other measures are lifted. A large call on government guarantees could significantly increase both public debt and refinancing costs of the public and private sectors. On the other hand, a successful deployment of vaccines covering the entire adult population in Andorra and in neighbors would bode well for a more favorable outlook.

Keeping Fiscal Policy Supportive and Building Reserves

Public debt remains sustainable despite temporarily increasing beyond the limit set by the fiscal rule. The stimulus related to COVID-19 worsened the central government overall balance to -4.3 percent of GDP in 2020 adding to the upcoming large debt repayments. These extra financing needs and a strategic increase of cash holdings were mostly covered by new debt, including through a first-time external private bond placement, which was oversubscribed. But planned public investments were reduced to accommodate pandemic-related spending, unlike in the EU on average. Central government debt increased to 48.4 percent of GDP, supported by activation of the escape clause of the fiscal rule. The authorities are working toward reducing gross financing needs by lengthening the average debt maturity and reducing interest costs. Higher revenues during the recovery—including from the introduction of the carbon tax and revisions to corporate tax deductions—and rolling back the COVID-19 measures will lead to primary surpluses from 2023, with debt declining to the fiscal rule limit of 40 percent of GDP.

Fiscal policy should remain supportive in the near-term and allow for higher public investment in the medium-term. The risk of renewed lockdowns and uncertainty with various virus strains call for maintaining emergency lifelines. These should only be rolled back gradually, reducing the coverage and generosity of programs if local transmission is low and activity begins to normalize. Some of the planned investments in digital technologies and in climate adaptation and mitigation could be brought forward in 2021 to support the recovery. Frontloading the planned public investment could boost private investment in tourism-related sectors, which are reluctant to invest during uncertain times. In the medium-term, greater infrastructure spending—such as improving transportation to better connect Andorra with European hubs—would diversify tourist origins, ease traffic congestion, and further increase competitiveness in the tourism sector. The planned reforms to the public pensions system are a step in the right direction toward reducing fiscal risks in the medium-term.

Over time, the fiscal authorities will need to build international reserves to cover their liquidity needs in the event of future strains. IMF staff assess such reserves needs to be about 12 percent of GDP, which would be sufficient to cover one month of imports, fiscal revenue fluctuations, and short-term external debt service. Against these liquidity needs, the currently available liquidity is limited to the reserve assets with the IMF, worth two percent of GDP at this stage. The remaining 10 percent of GDP could be built up over time through projected and windfall fiscal savings and continuing large current account surpluses. The liquidity needs of the government could increase if banks have a liquidity gap in the future, in the absence of a lender of last resort in euroized countries such as Andorra. The banks’ liquidity gap is currently zero with the adaptation of liquidity rules required by the EU. Various options are available to build up the necessary reserve assets.

Reinforcing Bank Health to Support the Recovery

Banks entered the pandemic with strong capital and profits, but with elevated nonperforming loans. Banks, with assets worth 450 percent of GDP, operate in Andorra and 12 other countries, specializing in private banking through foreign subsidiaries. This diversification has served the banking sector well, delivering higher profits than in banks in the region. Published bank capital is high enough to withstand the pandemic shock. Nonperforming loans are, however, higher than the region—partly due to the legacy in a bank undergoing resolution—and could increase when the exceptional pandemic-related policies are unwound.

As in many other small countries with large banking sectors, Andorran banks are exposed to additional risks from large exposures and related party lending. Large exposures to a few clients could lead to a higher sensitivity of loan losses to the economic downturn. Moreover, a considerable share of loans is extended to banks’ “related parties” such as shareholders. This poses risks as bank capital is not fully usable and needs to be adjusted for such positions.

In the near-term, ensuring banks’ sound health should enable them to increase lending as demand from the private sector picks up. The Andorran Financial Authority (AFA) should assess the impact of the pandemic on bank capital, extending moratoria only to eligible clients if needed. The temporary moratoria on debt service might have made bank balance sheets less transparent, and AFA should ensure that loan classifications and provisioning are made according to the regulatory standards.

In the medium-term, AFA needs to continue managing three key risks. First, it should consider additional capital in the form of “Pillar II” on related party exposures of specific banks. Second, it should continue to ensure that there are no liquidity gaps—that is, there are always high quality liquid assets to cover at least 100 percent of possible net outflows within the month—in banks. Third, the authorities should strengthen the monitoring of cross-border flows, including through cooperation with foreign counterparts, and continue deepening the understanding of money-laundering risks. The authorities are already aware of these supervisory needs and, at their request, IMF experts will work with them to strengthen bank supervision later this year.

Continuing to Close Data Gaps

The authorities recognize the importance of publishing statistics according to international standards. They are making rapid strides in further developing more comprehensive data on Andorra’s economy to improve surveillance. They produced balance of payments statistics, with support from the IMF, within a few months of membership. Other external, real, fiscal, and financial sector statistics need to be compiled and reported according to international standards. The authorities plan to work with the IMF in this area and participate in the Enhanced General Data Dissemination System, the first tier of IMF data sharing standard for macroeconomic data essential for policy making and surveillance.

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The mission thanks the authorities and all our other counterparts for sharing granular data and information, participating in a constructive policy dialogue, and engaging in a productive and transparent collaboration.



[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.

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