Nepal is in line to move up one notch in its economic development ranking after carrying the label of a least development country (LDC) for more than 50 years. In February, the United Nations Committee for Development Policy recommended Nepal’s graduation from the LDC category with a transition period of five years, meaning it will be effective in 2026. The decision was made on the basis of the country’s achievement in two of the three criteria: human assets and economic vulnerability involving a composite index of these measurements. It didn’t meet the per capita income criteria, which was $1,027 against the requirement of a three-year average with a threshold of $1,230.

With promotion imminent, a debate on whether graduation from the LDC status will be favourable for Nepal or not with respect to international support measures has intensified among policymakers. The Nepali business community, meanwhile, is bewildered by the prospect. Graduation from an LDC is undeniably a matter of self-esteem for the country. But it also raises questions about the potential economic costs caused by loss of access to international support measures provided to LDCs. In particular, Nepal will lose privileged international development finance and preferential market access after it graduates. Hence, these observations need precise assessment.

Bilateral relations

Concerning international financing, its implications on Nepal can be evaluated with respect to bilateral official development aid and multilateral financing schemes. Notwithstanding the LDC-specific official development aid target, access to development financing will depend largely on Nepal’s influence in bilateral relations with the donor countries in the post-LDC period. Allocation of bilateral aid depends not only on the recipient countries’ need, but also on the donor’s strategic and political considerations. Thus, access to development finance will essentially depend on Nepal’s performance in the utilisation of development finance.

However, financing from multilateral agencies like the International Development Agency and Asian Development Bank may be inaccessible as these organisations have their own eligibility criteria for concessional financing based on a threshold level of the per capita income, which is close to the LDC graduation criteria. This means graduation from the LDC status is unlikely to affect access to development financing, but it may involve some additional costs due to the loss of the privilege of soft loans. Therefore, concerns about the loss of access to development financing upon graduation seem to be exaggerated.

But concerns about the potential loss of preferential market access or duty-free, quota-free schemes in trade are reasonable. This is very relevant to Nepal's export trade as it enjoys preferential treatment to a great extent under different schemes. Nepal’s access to bilateral and regional preferential schemes will remain unaffected as these are based largely on reciprocal trade negotiations rather than solely on its development status. Therefore, proficiency in trade negotiations will be the determining factor in this regard.

But some negative implications can be expected with regard to LDC-specific schemes, such as the European Union’s Everything But Arms initiative which grants duty-free privilege to all LDC exports under the Generalised System of Preferences programme. The Generalised System of Preferences scheme, in general, will continue to apply to Nepal even after graduation because developing countries are also eligible for the Generalised System of Preferences under different conditions. Nevertheless, the Generalised System of Preferences is always uncertain because it is non-binding and is at the discretion of the bestower.

Regarding provisions under the multilateral system of the World Trade Organisation (WTO), Nepal will be partially affected by LDC-specific special and differential treatment. But most of the special and differential treatment provisions are available to other developing countries too. Of particular importance in this respect is the loss of the WTO aid-for-trade provision. Overall, the magnitude of such costs from LDC graduation will depend on the extent to which Nepal benefited from such measures before graduation.

No matter how high the cost of graduation from the LDC status, why is it so important? First of all, it is a big mistake to consider graduation from the LDC status as winning something. It is not the completion of an economic development process. In fact, it is merely a milestone in the development process. Borrowing the words from a United Nations Conference on Trade and Development (UNCTAD) report, ‘Graduation is normally expected to mark a move from economic dependence to a state of greater self-reliance.’ It reflects a graduating country’s commitment to overcome some distinct LDC characteristics, such as the vicious circle of the poverty trap, and the commodity trap of depending too much on a few commodities for employment, trade and foreign exchange. It is also a commitment to overcome the problem of import content in production and consumption which leads to severe trade deficits.

Economic traps

Unfortunately, Nepal is not totally free from these economic traps despite some signs of improvement in the economic vulnerability index. Although the country has reduced the poverty level to some degree, its performance in the diversification of production and trade is poor. Dominated by the export of manpower, the services trade has been a mainstay of the economy. This has led to boosting incomes and consumerism, ultimately resulting in an overwhelming import trade and trade deficit.

A lethargic industrial and export growth, which has lingered at over 3 percent of the country’s Gross Domestic Product for years, reflects a paradoxical economic performance. So disregarding these vital aspects of economic development will likely be costly. The ultimate goal is not graduation as such, but graduation with momentum to achieve the pre-takeoff stage in development. This means allowing industrialisation and export promotion in some specific areas with a balanced development approach.

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