Andorra’s finance minister, Jordi Cinca, explains to Stefanie Linhardt how budget consolidation and investment in tourist infrastructure are aiding the country’s slow but steady recovery from recession.

Jordi Cinca

Q: How did the Andorran economy perform in 2016? Did you feel any impact from the alleged money-laundering crisis at Banca Privada d’Andorra [BPA] in 2015?

A: In 2016, the Andorran economy made another step towards economic consolidation with an estimated gross domestic product [GDP] growth of 1.6%. This follows five years of recession from 2008 to 2012. We came out of recession in 2013. Growth has been slow recently but 2016’s predicted 1.6% improvement further underlines this positive tendency.

The numbers also show that the economy was able to deal with the BPA crisis and move on from these events. What happened has had some impact on investment, but now it is not an obstacle for our economy.

Importantly, in 2012 the government made the decision to open up Andorra’s economy, allowing foreign investors to hold 100% of a company’s capital. The decision to reform foreign investment, together with further transparency and our new tax framework, has allowed us to increase the number of new businesses and launch a new economic strategy. The introduction of direct taxes was necessary in parallel with the opening of the economy in order to maintain competitiveness with other countries and to reach double-taxation agreements.

Q: What is your outlook for the economy in the medium term?

A: Our growth expectations for 2017 are similar to 2016: between 1.5% and 2%. There is no element we can especially highlight but what we are going to see is an impact on the financial sector of the Automatic Exchange of Information agreement with the EU and the Organisation for Economic Co-operation and Development for 2018. But the financial sector is already prepared for this, so we don’t expect the impact to be greater than what we have already seen.

In 2017, we need to consolidate and continue our new fiscal model, especially in the consolidation of the main pillars of our economy: tourism, commerce and the financial sector. We have also seen an improvement in construction. In addition to that, we are going to see some results from the opening of the economy with new sectors developing. But we know that this will be a slow process and not something we are going to see this year.

Q: What are the priorities in your 2017 budget?

A: Our 2017 budget is continuing our policy since the new legislature started in 2012. We have three objectives.

First, to stop the growth of the deficit and reach a balanced budget. Since 2014, we have nearly had a balanced budget. The deficit was only related to the cost of financing our debt. In 2017 we want to continue this trend of the past few years and maintain a public deficit of less than 1% of GDP.

It is the objective of the government not just to maintain a balanced budget but to consolidate it. For this reason, we decided in 2014 to introduce legislation to limit central government debt at 40% of GDP. Many larger European countries have government debt ratios of more than 100% of GDP, but this is not an option for Andorra because of our size, as we don’t want to put our economy in danger.

Second, we want to diversify the income of the government. When we took over government in 2012, 90% of government income came from indirect taxes. With the peculiarity of Andorra of having some 70,000 inhabitants and an average of 8 million visitors a year it is normal to have a higher proportion of indirect taxes, but we needed to find a new balance between direct and indirect taxes. To achieve this, in 2014 we introduced the requirement for a balance of income between indirect and direct taxes.

Third, we are working on finding a solution to rising costs in the management of the public health system to be sustainable in the future, while maintaining quality. Another challenge is the financing in central and local administrations. It is necessary to normalise these costs to avoid future risks. We expect to start seeing results from the changes we are working on in the budgets of 2018 and 2019.

Q: You have talked a lot about budget consolidation and cutting the deficit. But as the economy is recovering, where have you made a strategic decision to invest?

A: As we are now recovering, there will be some investments made in infrastructure in 2017. But this is not transport-related infrastructure, which was the focus of investments in 2000, but instead related to making an impact on the productive capacity of the country in favour of opening the economy and boosting the tourism sector. So we want to, for example, invest in an international heliport that allows visitors to fly to Andorra.

In the next few years we also want to invest in a multi-functional building, which we hope will help attract additional international events to Andorra. Buildings such as the Cloud project, located in the centre of Andorra, can also support the commercial infrastructure of the country. We are now making the investments for which we did not have the resources in 2012 to accomplish our global goals.

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