Andorra La Vella: The Andorran economy continued to exhibit robust growth driven by external demand and a prospering financial sector. This economic strength combined with cautious fiscal management has translated into a strong fiscal performance, reinforcing fiscal buffers. Banks continued performing well, but their large size warrants ongoing close supervision. Challenges including low productivity and lack of affordable housing will put downward pressure on growth over the medium term and aging will strain public finances. The European Union Association Agreement (EUAA) would deepen 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.
Economic Outlook
The Andorra economy continued to outperform expectations. Growth in 2025 surprised on the upside for the second consecutive year, at an estimated 2.9 percent, driven by strong activity in financial services, real estate, and construction. Inflation eased from an average of 3.1 percent in 2024 to 2.4 percent in 2025. The labor market is operating at near full employment, while the current account surplus remains very large, estimated at 16 percent of GDP in 2025. Strong overperformance in direct taxes drove a higher-than-expected estimated central government surplus of 2.5 percent of GDP in 2025 contributing to a reduction in central government debt to below 30 percent of GDP in 2025.
Growth is projected to moderate and converge towards its potential over the medium term. Growth is projected to slow to 2.3 percent in 2026 and then steadily converge to 1.5 percent by 2030, as momentum from inbound immigration and related construction subsides, and tourism growth eases given Andorra’s already high number of visitors per capita. Inflation picked up recently with a flash estimate of 3.1 percent, year-on-year, in February mostly due to temporary factors. It is projected to decline to 2.3 percent in 2026 before converging to the euro area inflation target of 2 percent by 2027, reflecting lower import prices in line with developments in its main trading partners.
Short-term risks are broadly balanced with downside risks mainly stemming from external factors. As a highly open and fully euroized micro-state dependent on tourism and retail trade, Andorra remains exposed to external shocks and global uncertainty. While it is too early to estimate the impact of the latest geopolitical and trade tensions, weaker growth among trading partners could weigh on foreign demand. Global shocks could also push inflation higher through import prices. Recent temporary road closures underscore Andorra’s vulnerability in terms of cross-border infrastructure. On the upside, external demand could be more resilient and grow faster than expected.
Absent timely reforms, growth could well be lower over the medium term. In the absence of policy action, population aging will increase public expenditures on pensions and healthcare, placing growing pressure on public finances. Labor shortages could worsen if housing affordability is not improved, negatively affecting output and potentially reducing investment. Climate change poses additional risks, as rising temperatures and more frequent extreme weather events may cause more frequent disruptions in the tourism sector and infrastructure, putting additional emphasis on continuing diversification efforts. Approval of the EUAA represents an upside risk by supporting economic diversification and enhancing resilience to shocks.
Policy priorities
With the right policies, Andorra can sustain growth and address looming challenges. With elections planned for 2027, it is important that the government continues to implement its reform agenda. Undertaking an overdue comprehensive pension reform will ensure sustainability of the pension system and pave the way for other structural reforms.
Maintaining a balance between prudent fiscal management and growth-enhancing reforms
The near-term focus is on social priorities and closing the public-sector wage gap.
- The small surplus projected in 2026 is driven by investment and impacted by recent developments. The 2026 budget prioritizes affordable housing, social spending, and public investment. The approved budget targets a deficit of 1 percent of GDP. Given past practices, and the expected fiscal impact of the Pas de la Casa temporary road closure, staff forecasts a small surplus of about 0.3 percent of GDP.
- The government has adopted a two-year plan to increase public sector wages. This plan is grounded in a comprehensive civil service pay study, commissioned by the authorities, which identified remuneration gaps on a position‑by‑position basis. Based on these findings, public sector wages will be increased over 2026–27 to close the identified gaps. The inflationary impact of the projected wage increases is expected to be limited, reflecting the openness of the economy and the high import intensity of consumption. Nonetheless, the authorities should remain vigilant for signs of overheating and stand ready to tighten the fiscal stance to cool domestic price pressures if inflation remains elevated for longer than expected. Looking ahead, public sector wage dynamics should be calibrated to avoid adding to inflationary pressures.
Over the medium term, fiscal policy should balance buffer accumulation with growth-enhancing use of fiscal space, while preserving debt sustainability.
- Addressing healthcare costs. While the Andorra health system provides strong health outcomes, health-related spending has been rising well above inflation, population and economic growth. To make the system more sustainable, staff recommends: i) strengthening the management of medium-term government health spending, including through setting clear expectations for sustainable growth, ii) building on the draft health sustainability action plan, identifying potential savings and adopting measures in the budget process, including supporting increased treatment at the primary and community care level, tighter policies and processes governing sickness benefits, and reforming the payment structure for health providers to have less reliance on fee-for-service, and iii) continuing proactive development of services such as the aging unit at Servei Andorrà d’Atenció Sanitària (SAAS) that are efficient and support quality of life.
- Closer budget execution. Central government budgets have been characterized by repeated balance underestimation driven in part by uncertainty related to GDP estimates and persistent under-execution of public investment, although execution improved in 2025. Anchoring revenue forecasts to current-year outturns (as done in the 2026 budget) would better align budget projections with realized revenues. Executing budgeted investment using available fiscal space would help unlock growth-enhancing opportunities in the areas of affordable housing, workforce upskilling, transport connectivity, and administration digitalization to advance the diversification agenda while adhering to the fiscal rules and debt sustainability. Strengthening GDP forecasting would help improve revenue estimation and budget planning.
- A holistic approach to asset management. Prudent fiscal management has enabled Andorra to accumulate sizable fiscal and external buffers, complemented by substantial pension fund reserves. Establishing an overarching asset and liability management framework would help ensure adequate liquidity and strengthen coordination across asset classes. In this context, advancing pension reform would align the investment strategy of pension reserve fund assets with their long‑term liabilities.
Maintaining financial sector buffers commensurate with its risk profile
While recent financial results have been strong, banking assets remain large relative to the economy constituting a systemic risk. The Andorran banking sector has delivered consistently sound results in recent years, supported by a regulatory and supervisory framework increasingly aligned with EU standards under the Andorran Financial Authority (AFA). The EUAA would further enhance supervisory convergence by facilitating the exchange of information and best practices. Banks have continued to expand asset management activities abroad, primarily within the EU, strengthening income diversification. At the same time, the banking system remains very large relative to the domestic economy. Therefore, it is important for the AFA to continue its close supervision and for banks to maintain buffers commensurate with their risk profiles and cross-border activities. Preparations are underway for the Financial Sector Assessment Program (FSAP) in 2026—Andorra’s first since joining the IMF—and early capacity-building efforts by the AFA are welcome. The forthcoming FSAP will provide a valuable opportunity to assess progress and identify remaining vulnerabilities in the financial sector, including an assessment of systemic risk.
read more: https://www.imf.org/en/news/articles/2026/03/09/cs-principality-of-andorra-staff-concluding-statement-of-the-2026-article-iv-mission
