Andorra is a small country with just over 400 square kilometers between Spain and France. Despite its size and past as a tax haven, the economy in Andorra has grown by leaps and bounds in recent years. This has made it one of the preferred destinations for investors and digital nomads.
What is the economy like in Andorra?
Why is Andorra becoming the preferred destination for investors and companies? One of the main reasons is the economy. Andorra’s economic growth is booming. It is estimated that between 2022 and 2027, the Principality’s economy will surpass that of its neighbors Spain and France, but also the average of the European Union countries.
For example, if we analyze the Andorran GDP, we find that in 2022, this indicator grew by 9%, and it is expected that for the following years (until 2027), it will increase by up to 1.8%. To make these estimates, the economic forecasts of the countries around Andorra have been taken into account and follow the provisions of the International Monetary Fund (IMF).
As for inflation, another indicator that allows us to measure the economy’s growth in Andorra, we find that, compared to its neighbors and the EU, inflation remains low. To give you an idea 2019, Andorran inflation stood at 1%. While in 2020, the CPI suffered a deflation of 0.2%.
Certainly, let’s discuss the economy in Andorra.
Andorra is a country that, in 2021, began to experience considerable economic growth. After the hiatus caused by the pandemic, the fiscal year closed with a 3.3% increase in the CPI. However, the cost of living in the country increased (as in the rest of the countries) due to the behavior of the prices of services such as electricity, water, and housing.
Even so, and despite inflation, Andorra has always been below Euro Zone countries in this regard. Thus, inflation in the Principality for 2023 is expected to close at 4.7%, one point below EU countries.
Andorran banking system
To understand the economy in Andorra, it is very important to talk about the country’s banking system. At the end of 2018, the Principality ceased to be considered a tax haven. For years, firms holding shares in foreign companies were taxed at 2%, which was detrimental to the rest of the countries.
Moreover, in 2017, various transparency agreements with more than 50 countries came into force, and Andorra abandoned the banking secrecy that, until then, had protected undeclared fortunes in the countries of origin. As a result, it agreed to exchange customer banking information between financial institutions and EU and OECD countries.
Although there are only three banks in Andorra, you will be surprised to know that these entities closed in fiscal year 2022 with a growth of 16% and 113 million euros. The Andorran banking business model is sustainable and profitable, with an ROE of 7.62% and a solvency of 15.76%. The bank has a liquidity ratio of 201.29%, above the European banking average. Banking has been decisive for the growth of the Andorran economy, as it also has a low default ratio of 3.28%.
Diversification of the economic model
For many years, tourism and the economy in Andorra were two concepts that went hand in hand. Tourism and commerce were the main sources of income for the country. However, a few years ago, the government wanted to diversify the economic model to not depend exclusively on these two economic activities. This has been possible thanks to the approval of the Digital Economy, Entrepreneurship, and Innovation Law.
His provision favors digitalization and the creation of special economic zones to attract business investments with incentives. In addition, it offers aid for investment and development. In this regard, the Strategic Commercial Plan was also launched, which seeks to improve the competitiveness of the (commercial) sector through innovation and digitalization.
Investment: one of the pillars of Andorra’s economy
Although it is no longer a tax haven, Andorra is still a very attractive destination for investors due to its low taxation. The general VAT (IGI) is 4.5% compared to the 21% paid in Spain. But in addition to this tax, there is low corporate and income taxation, which does not exceed 10%. Why is Andorra a good investment destination?
The low taxation of the country, as well as its excellent health system, has made the Principality one of the preferred destinations for investors. Added to this is the proximity to France and Spain and the excellent quality of life (it is one of the countries with the highest life expectancy).
