Nepal has been a member of the Least Developed Countries (LDC) group ever since the group was created in 1971. But now the country is set to shed its 55-yr-old identity and graduate to a developing country in November 2026. How should we take this transformation?
We should view this development with optimism. There are two significant advantages to highlight. Firstly, it signifies Nepal's progression as a growing economy, transitioning from a least developed country to a developing one, a message that resonates strongly with the global community. Secondly, as a burgeoning economy, it presents a multitude of opportunities, fostering an environment conducive to attracting foreign investments. This is undeniably positive.
Furthermore, on the international stage, Nepal's prior advancement from a low-income nation to the lower-middle-income category in the World Bank's classification is noteworthy. This upcoming shift represents a dual accomplishment - from a low-income to a middle-income country as per the World Bank's categorization, and from a least developed country to a developing nation in the UN's classification. It's a powerful and affirmative message to the global community.
Nepal has failed to attract FDI to the tune of even one percent of its GDP so far. Will graduation help the country in this regard?
As mentioned earlier, the core message here is significant. Ultimately, a foreign investor seeks a promising rate of return. Achieving this necessitates comprehensive reforms in our policies, robust regulations, streamlining bureaucratic procedures, and aligning our human resources with their specific needs. While projecting an outwardly positive image is crucial, our internal groundwork holds equal importance. To attract foreign investment effectively, our focus must be on ensuring these foundational elements. By accomplishing these tasks, we can undoubtedly create an environment conducive to attracting foreign investors.
How is the graduation likely to affect Nepal’s international trade?
Previously, as a Least Developed Country (LDC), we benefited from duty-free and quota-free market access for our trade consignments. However, some of our key exports, like garments, were outside this scheme. While this adjustment won't significantly impact these products, the EU market might experience an estimated 20% effect, primarily in textiles and clothing.
Considering our trade dynamics, two-thirds of our exports head to India, underpinned by a bilateral agreement. Consequently, regardless of our LDC or developing country status, the impact is expected to be minimal. However, the situation does pose challenges, notably the 30% rule of origin, which might become more stringent post-graduation. This shift could potentially affect our exports to a certain extent.
How is the graduation going to affect the country’s access to international aid?
When considering international aid from institutions like the World Bank, IMF, and ADB, it's important to note that they do not categorize nations as Least Developed Countries (LDCs). Instead, they have classifications for low-income and lower-middle-income countries. Nepal has already transitioned from a low-income to a lower-middle-income country, indicating that loans from these multilateral financial bodies will remain largely unaffected.
However, at the bilateral level, there might be some impact. Certain studies suggest that countries like Korea and Japan could potentially reduce their aid, while others are inclined to continue their support to Nepal. Consequently, overall financial assistance might not see a substantial impact, but specific funds such as the Global Environment Fund (GEF) and Climate Fund designated for LDCs will likely be affected.
In fact, 70% of our development finance originates from ADB, World Bank, and IMF, which are expected to remain unaffected by this transition.
After Nepal’s graduation from an LDC to a developing country, the already low exports from the country are likely to dwindle further due to high tariffs. Similarly, it will not have access to funds specifically created for the LDCs. How is Nepal going to tackle this situation?
We need to approach this from two angles: market access and economic diversification. There's a misconception among some policymakers and the private sector regarding a shift from preferential trade to high tariff scenarios post-graduation. However, that's not the case. Even after graduating from LDC status, we remain eligible for the Generalized Scheme of Preferences (GSP) offered to developing countries.
Take the EU's GSP+ as an example, where they eliminate import duties on over two-thirds of tariff lines for exports. We have the opportunity to negotiate for GSP+ status, potentially retaining our duty-free, quota-free privileges. Simultaneously, we must focus on generating exportable surplus by diversifying our economy, emphasizing ways to increase production capacity, diversify our economic base, enhancing efficiency, and streamline trade facilitation processes.
What are the lessons for Nepal from countries that have graduated in recent times?
It's important to note that all the countries that have successfully graduated from LDC status are relatively small economies. Some, like the Maldives, are island-based, while others such as Bhutan have unique economic structures. Consequently, their experiences might not offer direct lessons due to these distinctive characteristics.
However, one area where we can glean valuable insights is in mobilizing development finance. Apart from that, their singular dependence on a specific product - tourism in the case of the Maldives or cocoa in other instances - limits the applicability of their experiences to diverse economies. Therefore, considering the limitations of their economic scale and single-product reliance, there might not be extensive lessons to draw from recently graduated small economies.
