Diplomatic Eye-EP 18

Nepal’s Graduation from LDC Status: Opportunities and Pitfalls (Video)

Nepal, one among the current 46 Least Developed Countries (LDCs), is scheduled to leave the list in 2026. A country graduating from LDC to Developing Country must meet any two of the three thresholds set by the Committee for Development Policy (CDP) of the United Nations Economic and Social Council. It is imperative to sustain consistent advancement in the criteria comprising Human Assets Index (HAI), the Economic and Environmental Vulnerability Index (EVI), and the Gross National Income per capita (GNI).

A report entitled, “Nepal’s Post LDC Graduation Scenario: An Economic Diplomacy Perspective”, published by IFA in 2023 discusses how Nepal is highly integrated with the global economy in terms of external trade both in merchandise and service, Official Development Assistance (ODA), and Foreign Direct Investment (FDI) claiming these three facets of Nepal’s economic diplomacy are key to analyze for its post LDC graduation strategy.

According to the IFA report, in terms of Foreign Direct investment (FDI), Official Development Assistance (ODA), and external trade in goods and services, the nation is extremely integrated with the world economy. The analysis of Nepal’s post-LDC graduation strategy revolves around these three aspects of its economic diplomacy. In contrast to landlocked and South Asian nations, the report further states that Nepal has not seen a surge in Foreign Direct Investment (FDI) despite its enormous potential. Since the creation of the category in 1971, Nepal has been classified as an LDC. Nepal has satisfied the requirements for graduation for three consecutive evaluations, in 2015, 2018, and 2021.

With regards to the required score of 66 or above, Nepal’s HAI score was 74.9. According to the UN Department of Economics and Social Affairs, it also scored 24.7 in EVI, against the requirement of 32 or below. In contrast to the required $1,222 per capita income, Nepal’s per capita income was $1,027 when the UN General Assembly accepted the resolution grading the country out of the LDC. The National Statistics Office’s statistics from the previous fiscal year shows that Nepal has not yet met this requirement.

With a 53% increase in the Human Development Index (HDI) between 1990 and 2018, Nepal has made notable progress in the index. The reduction of infant mortality from 78 to 32, neonatal mortality from 50 to 21, under-5 stunting from 57 to 36%, and maternal mortality from 539 to 239 per 100,000 live births have all contributed to the increase in life expectancy. Nepal can now graduate due to significant improvements in the education sector (Dhital, Sigdel& Shrestha, 2022).

Benefits of Graduating from LDC
Former Commerce & Industry Secretary Chandra Kumar Ghimire shares that graduating from LDC is a matter of national pride. Also, it will open up new avenues for the country’s trade sector. According to the United Nations, reaching such a significant developmental milestone, in general, can be seen as a pivotal moment in a nation’s history and, as such, can enhance emotion both domestically and internationally in ways that may not be quantified. Graduation, as per the UN, may be used by LDC governments as a barometer of development advancement, thus they stand to gain from a sense of accomplishment. As external perceptions improve so does international investment, yet measuring this is a huge challenge. While determining sovereign bond ratings, credit rating firms employ several subsidiary indicators but do not consider the LDC category.  In compliance with pertinent United Nations agreements, organizations and nations offer assistance for a “smooth transition.” Various approaches to aiding graduating and recently graduated nations are presently under investigation.

Following its graduation to the developing country category, Nepal may see lower exports to certain markets as a result of high tariffs, as well as negative effects on its ability to receive funding designated for least developed countries (LDCs).

Nepal may lose access to several trade privileges and flexibilities provided by World Trade Organization (WTO) regulations after it exits the LDC category. As an LDC, the nation currently enjoys a number of trade-related privileges that will eventually decrease or end completely after graduation. Nepal continues to receive these benefits for a first three-year transition period that can be extended for a further three years, and no eligibility will remain then after.

Former Secretary Ghimire foresees some obstacles particularly for SMEs and NTIS products as Nepal graduates. SMEs that engage a greater number of local people and industries witness the biggest challenges, he adds. The Nepal Trade Integration Strategy (NTIS) prioritizes institutional capacity, trade negotiation, and interagency collaboration in addition to strengthening the trade and export enabling environment. Ghimire states that Nepal’s several export products and NTIS items will encounter a high tariff wall and more stringent Rule of Origin (RoO) related conditions. He suggests modernizing the investment environment to draw foreign direct investment (FDI) for capital and technology transfer, encouraging innovation in ICT-based industries, and stepping up bilateral, regional, and multilateral trade negotiations, improvement in trade facilitation, amongst many others

In the meantime, the report prepared by SAWTEE, 2022 asserts that to achieve high economic growth and inclusive and sustainable development, Nepal should continue working to improve its economic structure, bridge development gaps, lower trade costs, manage and use resources more effectively, integrate its economy into regional and global value chains, and implement integrated policy reforms, including changes to its industrial and technological policies.

Since development partners do not consider LDC status to be a significant determining factor for allocating aid, graduation may not have a major effect on development financing. Nevertheless, we will not have advantage of some LDC-related funds including the Enhanced Integrated Framework (EIF) and the LDC Climate Change Fund (LDCF) following Graduation.

Razzaque (2020) states that LDCs are frequently excused from signing contracts and abiding to strict clauses. LDC graduation may result in a large loss of policy space supporting industries including pharmaceuticals, non-agricultural exports, and agriculture. Experts fear considerable difficulties to directly finance exports through subsidies and other means.

Although WTO members have been hesitant to challenge LDCs’ domestic support and policy space, graduation may lead to increased scrutiny to make sure regulations are being followed. Nepal, therefore, should focus on its core competencies. It does have natural competitive advantages in the tourism, agricultural, and hydropower sectors, as well as untapped potential for growth and job creation in these areas.

We keep a close watch on its further development.