Economy

Tourism, the mainstay of Andorra's tiny, well-to-do economy, accounts for roughly 80% of GDP. An estimated 9 million tourists visit annually, attracted by Andorra's duty-free status and by its summer and winter resorts. However, Andorra's comparative advantage has recently eroded as the economies of adjoining France and Spain have been opened up, providing broader availability of goods and lower tariffs.

The banking sector, with its tax haven status, also contributes substantially to the economy. Agricultural production is limited - only 2% of the land is arable - and most food has to be imported. The principal livestock activity is domestic sheep raising. Manufacturing output consists mainly of cigarettes, cigars, and furniture. Andorra's natural resources include hydropower, mineral water, timber, iron ore, and lead.

Andorra is not a full member of the European Union, but enjoys a special relationship with it, such as being treated as an EU member for trade in manufactured goods (no tariffs) and as a non-EU member for agricultural products. Andorra lacks a currency of its own and uses that of its two surrounding nations. Prior to 1999, these were the French franc and the Spanish peseta, which have since been replaced by a single currency, the Euro. Unlike other small European states that use the Euro, Andorra does not yet mint its own Euro coins; in October 2004, negotiations between Andorra and the EU began on an agreement which would allow Andorra to mint its own coins.

Background

Andorra's GDP (PPP) in 2005 was US$2.7 billion, with tourism as its principal component. Attractive for shoppers from France and Spain as a free port, the country also has developed active summer and winter tourist resorts. With some 270 hotels and 400 restaurants, as well as many shops, the tourist trade employs a growing portion of the domestic labour force. An estimated 11,600 thousand tourists visit annually.

There is a fairly active trade in consumer goods, including imported manufactured items, which, because they are duty-free, are less expensive in Andorra than in neighbouring countries. As a result, smuggling is commonplace. Andorra's duty free status also has had a significant effect on the controversy concerning its relationship with the European Union. Its negotiations on duty-free status and relationship with the Union began in 1987, soon after Spain joined. An agreement that went into effect in July 1991 sets duty-free quotas and places limits on certain items - mainly milk products, tobacco, and alcoholic beverages. Andorra is permitted to maintain price differences from other EU countries, and visitors enjoy limited duty-free allowances.

The results of Andorra's elections thus far indicate that many support the government's reform initiatives and believe Andorra must, to some degree, integrate into the European Union in order to continue to enjoy its prosperity. Although less than 2% of the land is arable, agriculture was the mainstay of the Andorran economy until the upsurge in tourism. Sheep raising has been the principal agricultural activity, but tobacco growing is lucrative. Most of Andorra's food is imported.

In addition to handicrafts, manufacturing includes cigars, cigarettes, and furniture for domestic and export markets. A hydroelectric plant at Les Escaldes, with a capacity of 26.5 megawatts, provides 40% of Andorra's electricity; Spain provides the rest.