BY NEWBIZ TEAM
On November 24, 2026, Nepal is all set to shed its 55-year-old identity of a least developed country (LDC) and join the ranks of developing nations. Despite currently holding the leadership position among the 46 countries listed as LDCs, Nepal's elevation to a developing country will mark a shift in its role and international standing. In a unanimous decision during the 40th plenary of the 76th Session of the United Nations General Assembly (UNGA) in November 2021, a resolution was adopted, solidly backing Nepal's advancement from the LDC category. This endorsement came with a stipulated preparatory period of five years. Notably, Nepal has held its status as an LDC since its inclusion in the group in 1971.
In its journey to graduate from the LDC status, Nepal must fulfill a set of criteria outlined by the United Nations, including per capita GNI, the human asset index (HAI), and the economic and environmental vulnerability index (EVI). Notably, Nepal has successfully met the HAI and EVI criteria in consecutive triennial reviews conducted in 2015, 2018, and 2021. Despite facing challenges and initially rejecting graduation in 2015 and 2018 due to factors such as the aftermath of the 2015 earthquakes and a lower per capita income, Nepal eventually agreed to graduate by 2026 during the 2021 review. It is noteworthy that Nepal stands as the sole country set to graduate without fulfilling the per capita income criterion. At the time of the UN General Assembly's adoption of the resolution for Nepal's LDC graduation, the country's per capita income was $1,027, falling short of the required $1,222.
Nevertheless, Nepal has consistently fulfilled the remaining two criteria. The HAI for Nepal stood at 74.9, surpassing the stipulated requirement of 66 or above. Additionally, the EVI registered at 24.7, well below the specified maximum threshold of 32, as per data provided by the UN Department of Economics and Social Affairs.
Nepal's economy bore the brunt of the Covid-19 pandemic, experiencing a notable contraction of 2.4 percent in the fiscal year 2019-20, coinciding with the onset of the pandemic. Subsequent fiscal years, namely 2020-21, 2021-22, and 2022-23, witnessed a gradual recovery with growth rates of 4.3 percent, 5.8 percent, and 2.16 percent, respectively, as reported by the National Statistics Office. The crisis induced by the depletion of foreign exchange reserves, a liquidity crunch in the preceding fiscal year, and the ongoing revenue shortfall in the current fiscal year have laid bare the inherent vulnerabilities within Nepal's economic landscape.
Despite the challenges posed by the Covid-19 pandemic, Nepal stood firm on its commitment to graduate from the LDC status by 2026, showcasing a departure from previous instances where such plans were reconsidered. Dr. Posh Raj Pandey, the Executive Chairperson of the Kathmandu-based think tank, South Asia Watch on Trade, Economics, and Environment (SAWTEE), expressed confidence that Nepal, despite the setback, is poised to maintain its progress in the specific areas outlined by the United Nations.
Dr. Pandey asserts, "As long as Nepal sustains economic growth, even if incremental, the trajectory of its per capita income will persist in an upward trend." He highlights that the strides made in education and health, pivotal components of the HAI, are unlikely to witness a reversal. Pandey emphasizes the enduring nature of educational achievements, stating, "A literate individual today is poised to remain literate tomorrow, and absent a major epidemic or pandemic, advancements in health are not expected to undergo a regression."
Dr. Pandey further contends that Nepal's economic and environmental resilience remains intact, barring the occurrence of severe droughts affecting agriculture or significant natural disasters jeopardizing livelihoods. He emphatically states, "Retracting from the graduation plan would be a point of national shame, as the international community is likely to perceive Nepal as having effectively graduated regardless."
The repercussions of the Covid-19 pandemic, leading to a substantial decline in income for certain demographics, have resulted in an alarming consequence. The National Planning Commission estimates that approximately 1.2 million additional Nepalis have been thrust into the clutches of poverty. This economic setback is anticipated to cast a shadow over the social sector, with projections indicating an upsurge in school dropout rates and malnutrition cases, thereby impacting the formation of human assets. Notably, these impending challenges have yet to be factored into the country's preparations for the transition, and a comprehensive assessment of the Covid-19 impact on the social sector and the economy may necessitate several more years.
Despite these concerns, the government appears undeterred, showing no signs of apprehension. The confidence stems from Nepal's commendable scores in human assets and economic vulnerability indices, which surpass the established thresholds. This optimism is driving the government's contemplation to forge ahead with the graduation process.
Advantages of Graduation
Ascending from the LDC category carries a global endorsement of developmental accomplishments, potentially elevating Nepal’s standing in the international community. This positive recognition has the capacity to attract increased foreign direct investment (FDI), as it sends favorable signals to foreign investors regarding the nation's conducive and business-friendly environment.
Post-graduation, Nepal stands to potentially qualify for GSP+, an exclusive incentive program promoting sustainable development and good governance, offering a potential compensatory measure for the loss of Generalized System of Preferences (GSP) privileges. Furthermore, the nation could engage in negotiations for trade agreements with other countries on a more equitable basis. The transition to a developing status could also pave the way for fresh opportunities in regional and global integration.
Post-graduation, securing foreign loans is anticipated to become more accessible, albeit with a marginal increase in interest rates. Notably, the private sector is expected to benefit from lower interest rates. Additionally, the cost of Letter of Credit (LC) confirmation for our traders is projected to decrease, thanks to foreign banks. This positive shift is likely to attract increased foreign investment, subsequently bolstering employment opportunities in the country. Moreover, there is potential for an uptick in VAT, tax, and revenue collection, contributing to overall economic growth.
In the "Nepal Human Development Report 2020: Beyond LDC Graduation: Productive Transformation and Prosperity," a collaborative effort between Nepal’s National Planning Commission (NPC) and the United Nations Development Programme (UNDP), notable benefits of transitioning beyond the LDC status are underscored. According to the report, this elevation enhances a nation's creditworthiness, garnering increased favour from international credit rating agencies and consequently facilitating improved access to commercial finance.
“Graduation from the LDC category would transmit a positive message to the global community about Nepal’s development prospects. It can be branded as a potentially competitive destination for foreign direct investment inflows and other private investments,” says the report.
However, Nepal's creditworthiness remains undetermined, given the absence of a sovereign rating in the country's history. The nation has struggled to attract foreign direct investments (FDI), amounting to less than one percent of its gross domestic product (GDP) thus far. Experts caution that ongoing political and policy instability, stemming from frequent political changes, could hinder Nepal from fully capitalizing on the benefits of its graduation.
Challenges of Graduation
Following Nepal's transition to the developing country category, the prospect of diminished exports to certain markets due to heightened tariffs and a potential adverse impact on access to funds designated for LDCs is highlighted in the report prepared by the NPC and the United Nations Development Programme (UNDP). The report suggests that financial support from the UN group may experience a decline, while assistance from multilateral entities such as the World Bank and the Asian Development Bank, as well as most bilateral donors, is anticipated to remain unaffected.
Upon graduation from the LDC status, Nepal stands to lose the numerous trade preferences and flexibilities afforded by the World Trade Organization (WTO) rules. Currently, as an LDC, the country benefits from various trade-related advantages that will either diminish or cease altogether post-graduation. An illustrative example is Nepal's current export arrangement with the European Union (EU) under the 'Everything But Arms' (EBA) initiative, which grants duty-free market access. Presently, the EU imposes no tariffs on goods, excluding arms and ammunitions, imported from LDCs like Nepal. Although Nepal will retain these benefits for an initial three-year transition period post-graduation, extendable for an additional three years, the subsequent loss of eligibility looms thereafter.
This would disproportionately impact export-oriented small and medium enterprises and the jobs they create. Exports to the EU could decline by as much as 57 percent due to the lack of preference, the NPC-UNDP report says.
As outlined in a report titled "Nepal’s Graduation from the LDC Category: Implications for International Trade and Development" by SAWTEE, the country could experience a decline in exports ranging from 2.5 percent to 4 percent due to heightened tariffs. While the European Union (EU), the United Kingdom, and Turkey extend a three-year transition period post-graduation, exposing Nepal to new tariff regimes, other preference-granting nations will adopt varying post-graduation measures. Notably, the NPC-UNDP report indicates a relatively modest 1.5 percent tariff increase in the United States, which stands as the largest market for Nepal's exports after India.
Arguably more crucially, with the transformation from an LDC to a developing country, Nepal will forfeit its eligibility for grants and soft loans under the official development aid (ODA), a support it has relied on since 1971. The commitment by developed nations to allocate 0.15-0.20 percent of their Gross National Product (GNP) in ODA to Least Developed Countries (LDCs) will no longer be extended to Nepal. The repercussions of losing access to LDC-exclusive concessional funding pose a potential setback to the country's developmental trajectory.
In addition to the aforementioned challenges, Nepal's graduation would entail the loss of access to specialized funding avenues, notably the Green Climate Fund (GCF), crucial for building resilience against the escalating threats of climate change. Given Nepal's projected vulnerability to the impacts of the climate crisis, the absence of GCF financing could constitute a substantial setback. Furthermore, the UN Technology Bank, designed to augment the role of science and technology in the sustainable development of Least Developed Countries (LDCs), would cease to extend its assistance to Nepal upon its ascent to the category of developing countries.
Industries reliant on exports express apprehension over the potential loss of markets for their products. Drawing parallels with the aftermath of the abolishment of the multi-fiber agreement (MFA) in 2005, Nepal's garment sector, which had previously thrived on the quota system provided by the U.S. under the MFA, experienced a significant decline in garment exports, ultimately leading to a downturn in the industry. Samik Bikram Shah, senior vice-president of the Nepal Carpet Manufacturers and Exporters Association, voiced concerns, expressing worry about a similar fate for the carpet industry.
“Post-graduation, the absence of tariff advantages under the General System of Preference will render our products more expensive in comparison to those of our competitors. This concern is compounded by our dependence on imported raw materials and the observed increase in labor costs,” he explains.
Once the existing concessions vanish, Nepal may seek refuge in the European Union's Generalized Scheme of Preferences (GSP) or another alternative known as GSP Plus. However, these schemes afford developing countries duty reduction or suspension on only approximately 66 percent of tariff lines. Additionally, under GSP and GSP Plus, the minimum required domestic value addition would surge from 30 percent to 50 percent. In practical terms, this signifies that Nepal must domestically produce at least 50 percent of inputs, encompassing labour and other raw materials, to fully capitalize on the special benefits offered by GSP and GSP Plus, a notable increase from the 30 percent requirement under the current Everything But Arms (EBA) arrangement.
The majority of countries and regions now impose elevated requirements for domestic value addition on goods from developing nations seeking preferential treatment. For instance, under the South Asian Free Trade Agreement (SAFTA), Least Developed Countries (LDCs) must achieve a local value addition of 30 percent, while non-LDCs face a higher threshold of 40 percent. Failure to meet these criteria on domestic value addition results in the denial of preferential treatment, including duty-free quota-free access. For countries newly graduated, this poses a dual challenge, as many of their goods may no longer qualify for duty-free quota-free entry following the transition. In essence, once these nations enter the ranks of developing nations, a considerable portion of their goods, previously enjoying duty-free quota-free access due to their LDC status, will now be subject to higher tariffs—although it's worth noting that this won't impact Nepal's trade with India, its largest trading partner, given the influence of the bilateral trade treaty.
In the broader context, a recent report from the World Trade Organization (WTO) forecasts that Nepal is likely to face an average tariff hike of approximately eight percent on all exported goods following its graduation. This estimate is based on the assumption of the full utilization of preferential treatment offered to Nepal. However, it's important to note that Nepal has historically not fully leveraged LDC-specific preferences.
What should Nepal do?
In November 2021, the United Nations General Assembly granted Nepal and its businesses a five-year preparatory period to navigate the detrimental effects of the loss of preferential treatment. Presently, the NPC is formulating a transition strategy aimed at mitigating the adverse impact of the graduation on the country's economy.
NPC member Ram Kumar Phuyal emphasized that the strategy will center on assessing the economic repercussions of LDC graduation and devising a compensation mechanism. Phuyal stated, "We will incorporate actionable measures and delineate the roles of both the government and private entities tasked with executing these strategies."
As per a study report by SAWTEE, Nepal's exports are poised to withstand significant damage due to the fact that India constitutes approximately two-thirds of its export destination. The existing bilateral trade agreements between Nepal and India allow for nearly tariff-free export of the majority of goods. Additionally, there exists potential for exporting goods to other South Asian countries under the South Asia Free Trade Area Agreement (SAFTA).
SAWTEE Chairman Dr. Pandey remarked, "We have the opportunity to join the GSP+ mechanism of the EU, offering duty-free access to as much as 70 percent of goods." In the event of being unable to secure entry into this mechanism, alternative negotiations for the most favoured nation's status are on the table. The GSP+ entails special incentives for developing nations to advance sustainable development goals and uphold good governance. Dr. Pandey further noted ongoing endeavours to extend the timeframe for LDCs before the cessation of their current facilities under the World Trade Organization.
Nepal faces a persistent challenge in boosting its export performance. A UNESCAP working paper highlighted this weakness, revealing that Nepal has yet to tap into two-thirds of its export potential. In the fiscal year 2022/23, out of a total trade volume of Rs 1,769 billion, exports accounted for a mere Rs 157 billion, significantly falling short of the country's export capacity.
Economist and former vice-chairman of NPC, Dr. Biswo Nath Poudel, says, "Given Nepal's current struggle to leverage trade preferences for accessing international markets, the graduation is not anticipated to impose a severe blow on the country's exports." However, Dr. Poudel stressed the importance of conducting a vulnerability assessment. He suggested that, guided by this study, Nepal should engage in bilateral discussions and leverage regional arrangements to safeguard its exports. He also recommended the implementation of incentives for sectors particularly sensitive to the erosion of preferential and special treatments, facilitating their recovery from potential losses.
Nepal has yet to undertake an all-encompassing independent study on the ramifications of graduation, with existing research primarily conducted by development partners such as the UN. These partners have established support mechanisms designed to aid LDCs throughout the transition period. Notably, the Enhanced Integrated Framework, a collaborative effort involving 51 countries, 24 donors, and eight partner agencies, has committed to supporting LDCs in trade-related matters for five-year duration post-graduation. The UN Technology Bank has similarly opened its facility to LDCs for a five-year period following graduation. Even the WTO, though lacking specific provisions for LDC graduation, has been engaged in discussions since 2017 to formulate support mechanisms for countries navigating this transition, indicating the integration of the graduation issue into the WTO agenda.
With the escalating prominence of the LDC graduation issue, countries in the least developed category are advocating for an extension of concessions granted by Article 66.1 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) to graduated LDCs, spanning a period of 12 years. Article 66.1 of the TRIPS Agreement has hitherto exempted LDCs from complying with the majority of the pact's provisions, with the exception of Articles 3, 4, and 5, primarily centered on the 'most favoured nation' principle, which bars discriminatory practices between trading partners. If the demand of the LDCs is met, one of the significant beneficiaries in Nepal would be the pharmaceutical sector, gaining the ability to produce and export patented pharmaceutical products without impediment.
International Support
Several Asian nations point to the Maldives as a cautionary example, contending that premature graduation could give rise to complications. The Maldives, opting to delay its graduation for seven years until 2011 following the devastating tsunami of December 2004, encountered notable challenges, particularly in the realm of trade, owing to the nascent nature of the graduation programme. At the point of the Maldives' graduation, only two countries—Botswana and Cabo Verde—had previously graduated, resulting in a notable "lack of coordinated commitment from bilateral partners" that hindered the smooth progression of the graduation process.
Presently, the situation differs markedly. The UN Conference on Trade and Development (UNCTAD) has put forth a proposal for the creation of a "graduation support facility" aimed at offering technical assistance to LDCs undergoing graduation, aiding in their preparation and management of the process. Another UN entity, the Economic and Social Commission for Asia and the Pacific (UNESCAP), actively contributes to identifying sustainable approaches for LDC graduation. Encouragingly, a 2018 UNCTAD report reveals that both multilateral and bilateral donors have affirmed that the graduation of LDCs, including Nepal, is unlikely to result in significant alterations to the allocation of aid, including concessional finance.
Certainly, certain UN organizations like UNDP and UNICEF are poised to reduce aid to Nepal post-graduation, obligated as they are to allocate 60 percent of their total support to LDCs. Additionally, Nepal may face the potential loss of another LDC-specific support mechanism, the Least Developed Countries Fund (LDCF), overseen by the United Nations Framework Convention on Climate Change (UNFCCC). The LDCF extends assistance related to climate change. Despite the potential discontinuation of this specific aid, Nepal will retain eligibility to access various other climate change funds even post-graduation. However, it may find itself in competition with other developing nations, as certain funds prioritize LDCs, small island developing states, and African nations.
(SAWTEE Chairman Pandey emphasizes that Nepal needs to recognize the impermanence of aid and trade preferences, which will inevitably fade as the country advances on the development trajectory. Pandey asserts that the enduring solution to Nepal's challenges lies in bolstering capacity across various sectors. Furthermore, he suggests introspection, urging Nepal to reflect on how countries like Bangladesh have made significant strides while Nepal has remained relatively stagnant.
Conclusion
Ahead of the official graduation, there are critical issues that demand attention. Notably, our tax-to-GDP ratio remains relatively low. Leveraging technology effectively presents an opportunity to substantially enhance tax collection. Modernizing the tax collection system is imperative to prevent tax evasion comprehensively. Furthermore, a concerted effort is essential to halt money laundering, holding those accountable who engage in such activities.
Furthermore, Nepal will face intense competition with foreign businesses in the arena of international commerce post-graduation. In the ensuing years, substantial revisions to import-export policies are imperative for effective competition on the global stage. Despite the challenges, these policy adjustments promise long-term benefits. Simultaneously, our industries must adopt a more environmentally and socially conscious approach. The imperative to modernize and humanize businesses becomes even more pronounced as we embrace green energy practices and champion workers' rights. This transformation is essential for exporting goods at prices that remain competitive in the market. Additionally, there is a need for more effective and targeted economic diplomacy in light of the altered circumstances.
Securing free trade agreements with multiple nations is imperative for sustaining our gains in international commerce beyond the expiration of our LDC classification. Drawing inspiration from the success of Vietnam in forging such partnerships and agreements, Nepal should actively pursue similar endeavors. Proactive engagement in these agreements will be instrumental in ensuring continued access to markets for our goods and fostering economic growth.
Simultaneously, we must shift our nation's orientation from being predominantly a net importer to one that is more export-focused. By diversifying our domestic market, we enhance its resilience to potential shocks resulting from increased integration with the global economy. This transformation is essential for fostering economic stability and sustainability in the face of evolving global dynamics.
In essence, the transition from the LDC status marks a pivotal moment in Nepal's history. The collective efforts of the Nepali people have propelled the country and its economy to this significant juncture. Soon, we will proudly declare ourselves a developing nation. The government plays a crucial role in ensuring that the challenges accompanying this transition are met with prudence and foresight, safeguarding the hard-earned progress of the nation.
'Lessons from other LDCs'
Several countries that have either graduated or are in the process of doing so have not only devised seamless transition strategies but have also successfully put them into action. These proactive nations are poised to reap the rewards of graduation or, at the very least, mitigate the perceived impact of this transition. This stands in stark contrast to those countries that have primarily engaged in debates without substantial progress toward aligning graduation with their developmental aspirations. Examining examples from the Asia-Pacific region, where the majority of Least Developed Countries (LDCs) are undergoing graduation, provides valuable insights into effective approaches.
Vanuatu, having graduated in 2020, stands as a notable example of effective post-graduation strategies. The country implemented an electronic single window system and embraced a paperless trade system, leading to a remarkable reduction in document processing time from 6 days to a mere 10 minutes. This not only significantly cut trade costs but also bolstered revenue through heightened transparency. Vanuatu's Department of Customs and Inland Revenue witnessed an impressive surge in revenue collection, soaring from approximately USD 33 million in 2016 to the current valuation of USD 134 million since the introduction of the single window. The success of this initiative prompted the Vanuatu Parliament to recently approve its budget, ensuring its continuity into the next phase.
In preparation for its graduation in 2023, Bhutan has taken significant strides in enhancing transparency and efficiency. The Department of Industry has introduced the e-Regulation Portal, an online platform consolidating trade, investment, and construction-related information and procedures. This initiative represents a substantial commitment to promoting transparency in investment rules and regulations. Notably, the portal's accessibility has been extended to the websites of Bhutanese Missions and Embassies abroad, showcasing Bhutan's dedication to facilitating international engagement and promoting a transparent regulatory environment. Between the launch of the Portal during the COVID-19 pandemic time (November 2020 and August 2022), the Division of Foreign Investment was able to swiftly approve 104 domestic and FDI investment projects worth USD 365 million.
Bangladesh, slated to graduate alongside Nepal in 2026, is proactively gearing up for the transition. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) took a significant step by launching the Center of Innovation, Efficiency, and Occupational Safety on November 18, 2022. Positioned as a knowledge hub, the Center focuses on advanced technology, including Industry 4.0, global best business practices in the apparel sector, and the latest trends in the global fashion industry. Its overarching goal is to assist BGMEA member enterprises in adopting digital technology, enhancing competitiveness and efficiency, reducing trade costs, and ensuring compliance with social and environmental norms. This initiative underscores Bangladesh's commitment to staying at the forefront of innovation in the post-graduation landscape.
Cambodia, having met the graduation criteria for the first time in 2021 and potentially graduating after Nepal and Bangladesh, has been actively engaging in regional and free trade agreements. Notably, the country ratified the Regional Comprehensive Economic Partnership Agreement in 2022. Additionally, bilateral free trade agreements with China and South Korea, inked in recent years, came into force in the same year, expanding Cambodia's trade horizons. Most recently, on April 27, 2023, Cambodia concluded the Comprehensive Economic Partnership Agreement with the United Arab Emirates, further diversifying its trade partnerships and signaling its commitment to navigating the post-graduation economic landscape with strategic agreements.
Despite already being the leading recipient of Foreign Direct Investment (FDI) among Least Developed Countries (LDCs), Cambodia is taking proactive measures to enhance its appeal to foreign investors. The approval of a new investment law in 2021 reflects the country's commitment to modernizing local industries and safeguarding investor rights. The legislation goes a step further by outlining incentives to promote key industries and activities, particularly in strategic areas like high-tech and green technology. This forward-looking approach aligns with Cambodia's ambition to diversify its exports beyond the dependency on trade preferences in the readymade garments sector, showcasing a concerted effort to bolster competitiveness and sustainability in the post-graduation economic landscape.
