The Andorran economy is recovering strongly from the pandemic, supported by a rebound in tourism, retail trade, construction, and professional services. Real GDP is expected to reach pre-crisis levels in the second half of 2022. While the unemployment rate is amongst the lowest in Europe and continues to decline, pockets of vulnerability remain. Notwithstanding significant policy buffers, there are still substantial downside risks, notably the impact in Europe of the war in Ukraine, higher than expected inflation, and a resurgence of infection rates.
1. The Andorran economy is recovering strongly from the pandemic, but GDP remains below pre-crisis levels. Andorra faced the largest GDP contraction in Europe in 2020 (-11.2 percent), due to its high dependence on tourism. Decisive policy support and well-targeted containment measures prevented a deeper fallout. With the reopening of borders by neighbors in April 2021 and the implementation of a successful vaccination campaign, the economy rebounded sharply, growing at 8.9 percent in 2021. The improvement in the health situation allowed a relaxation of containment measures and a resumption in tourism flows, driving the strong recovery. However, GDP is estimated to have remained 2.2 percent below pre-crisis levels by the end of 2021 with some headline labor market indicators not fully recovering either.
Andorra’s large banking sector (with assets equal to 600 percent of GDP and assets under management—largely off-balance sheet—nearly 23 times the GDP), which is dominated by private banking, is a key feature of the economy. The aim of this paper is to systematically analyze its main features. Building on key stylized facts and cross-country comparisons, the paper discusses the implications of the business model of Andorran banks and the associated vulnerabilities, particularly those related to the reliance on foreign funding, the focus on private banking, and the use of internationalization to grow and remain competitive. These vulnerabilities and the exposure to risks calls for continued vigilance and strong supervision.
Andorra’s growth potential is estimated to be low, though in line with the region. This could be explained by low levels of investment, both private and public, as well as multiple structural vulnerabilities that may be limiting the country’s growth potential. Boosting growth in the medium term calls for a multi-pronged approach aiming at diversifying the economy, increasing investment, and building human capital.
Reforming the Andorran pension system is a key priority to ensure its sustainability and reduce contingent liabilities. In the absence of reform, the Andorran social security system will accumulate deficits starting in 2024, rising to about 9 percent of GDP per year by 2040. The Andorran Parliament has appointed a special commission to elaborate a reform plan before end-2022. This paper draws on scenario analyzes to identify options available for an optimal reform. The results show that measures will need to be comprehensive and adjust all three key parameters—the contribution rate, the conversion factor, and the retirement age. Reforms will need to also be guided by public policy choices on affordability, adequacy, and equity that go beyond the scope of a sustainability analysis.