Principality of Andorra

Andorra’s small open economy continues to grow above potential driven by external demand and a prospering financial services industry. Inflation is edging upwards after a period of moderation amidst a labor market operating near full employment. Cautious fiscal management continues to drive overall budget surpluses and reinforce fiscal buffers. Banks are profitable with ample capital, however, the size of their consolidated assets – at more than 5 times GDP – presents a systemic risk. The war in the Middle East will weigh on growth and put upward pressure on inflation in the near term while challenges including low productivity, lack of affordable housing, capacity limitations, and impact of climate change on winter tourism will put downward pressure on growth over the medium term and aging will strain public finances. The European Union Association Agreement (EUAA) offers the opportunity to deepen the integration into the EU’s single market and diversify Andorra’s sources of growth, but there will be transition costs and the exact timeframe for ratification remains uncertain. Reforms to the public pension and healthcare systems are needed to make them sustainable.