The International Monetary Fund (IMF) Executive Board has completed its Article IV consultation with the Principality of Andorra. The Board endorsed the staff's appraisal after reviewing the economic conditions in the region.
Andorra's economy is currently robust, with an unexpected growth of 2.1% in 2024, primarily driven by the service, banking, and construction sectors. Inflation showed a gradual decline to 2.6% by the end of the year, occurring alongside limited economic slack and a tight labor market.
The current account surplus remained large, estimated at 15.1% of GDP in 2024, partly due to strong banking sector performances, supported by high interest margins and increased fees. Projections indicate that GDP will stabilize at a long-term potential of 1.5%, while inflation is expected to decrease further to 2% by the end of 2025, reflecting trends in neighboring areas.
Notably, short-term risks appear balanced, with potential disruption from global economic uncertainties and possible benefits from stronger demand for services. Long-term challenges arise from stagnant GDP per capita, an aging population, and climate change impacts. However, economic diversification and increased investment could bolster medium-term growth.
The adoption of the EU Association Agreement poses both opportunities and challenges. It could support reform momentum and diversification, while demanding adaption to new standards.
The IMF Executive Board stated, "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." They noted that Andorra's external position remains strong, referring to the current account surplus as stronger than fundamentals suggest.
The Board also observed challenges over the medium term, prompting a recommendation for continued fiscal discipline to maintain fiscal space. The 2025 budget, with a conservative stance focusing on housing and other structural priorities, was positively received. Fiscal reforms, including pension and healthcare systems, are deemed crucial for long-term social security sustainability.
In the banking sector, vigilance is recommended due to changes in the financial landscape and the potential EU Association Agreement, despite the sector’s solid fundamentals and profitability.
Directors of the Board commended Andorra's macroeconomic management: "Directors commended Andorra’s resilience to external headwinds and the authorities’ sound macroeconomic management, that allowed to rebuild solid buffers." They highlighted the importance of prudent policy maintenance and structural reforms to support growth.
The IMF's Article IV consultation takes place under its Articles of Agreement, where bilateral discussions occur between the IMF and member countries, usually once a year.