Developing country, here we comeNepal’s graduation from LDC status is imminent, and the private sector seems to have stage fright.
The 12 poorest countries in the world, Nepal among them, are currently at different phases of the process for graduation from the category of least developed country (LDC). The United Nations Committee for Development Policy has recommended that Nepal graduate from the LDC status in 2026, after the UN General Assembly approves it. Nepal’s case is unique. It is the only country that was made eligible for graduation without meeting the per capita threshold criteria of $1,230 in 2021, and its graduation was approved based on its achievement in composite human assets and the economic vulnerability index, two of the three criteria for eligibility. This has raised doubts among stakeholders, particularly the country’s private sector, over the successful transformation of the country from an LDC to a developing country.
While presenting a study on the private sector's perspective on this issue under the auspices of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) recently, I saw that the participants had two issues on their minds. One, they were curious about the relevance of the country’s graduation from LDC status in the prevailing economic situation. Two, they doubted the country’s capacity to overcome the graduation challenges, besides being concerned about the possible impact of the loss of LDC-specific international support measures on the economy.
Reason for graduation
Regarding the first point, let’s examine what prompted the graduation initiative. The Istanbul Programme of Action for the LDCs during the decade (2011-20) considered graduation from the LDC category as an essential milestone on the development path, and identified at least half of the LDCs as satisfying the eligibility criteria in the stipulated time period. Nepal aimed for the goal for the first time in 2013 with a minimum 7 percent annual growth rate. The 15th Development Plan provided additional impetus to accomplish it by 2024. Despite erratic growth rates, Nepal’s performance in raising human assets and reducing economic vulnerability favoured it for recommendation by the Committee for Development Policy in early 2021. Considering the global pandemic and the existing economic situation, the transition period for Nepal was extended to 2026. Meanwhile, the government could gain political advantage and claim it as an achievement in the development plan without adequately assessing the graduation and a strategy to overcome the potential loss of LDC-specific advantages to the country.
Regarding the second point, there are three challenges in front of Nepal. They include the loss of preferential market access, entitlement to privileged development financing, and flexibility in meeting international regulations and obligations. While the implications of the latter two look relatively less severe due to the availability of special treatment and flexibilities even after graduation, the former could be a setback for Nepal as it is strictly binding to LDC conditions.
Exports to India which account for about half of the country’s export trade and is not tied to LDC conditions for preferential treatment will not be affected, but shipments to overseas destinations, particularly to the European Union and the United States that absorb a major portion of the remaining half, could be hit at least in the initial period of the graduation for two major reasons. One, a large portion of Nepal’s exports to the EU and the US, which enjoy preferential market access, will be subject to equal or less than the general tariffs applicable in these countries. This will erode preference margins and reduce Nepal’s exports to these important destinations. Two, it will be virtually impossible for Nepal to hold its position in these export markets without tariff advantages in the existing situation. Nepal’s export trade is characterised by the domination of non-dynamic export products, low market penetration and low export sophistication.
According to the World Trade Organisation, based on the 2016-17 average export value and an estimated increase in tariff by 9 percent on average, Nepal is expected to lose about 3 percent of its exports compared to less than 1 percent for other graduating LDCs. And about 50 percent of this total loss will be shipments to EU countries, pointing to the importance of the European market for the country’s export sustainability. Nepal benefits from the EU’s Everything but Arms programme, which offers virtually complete duty-free treatment to all exports from all LDCs. And because the EU preference coverage is higher, Nepal is expected to witness one of the highest tariff increases in the EU afterwards—an average of 8 percent against 4.1 percentage points based on the current export structure in the LDCs.
What the FNCCI can do
Compared to the EU, the potential loss in the US will be minor as Nepal's exports to the American market are dominated by clothing and textile-based products, which are already subject to US tariffs. Considering these two cases, it is evident that the greater the preference coverage and the tariff advantage, the greater the potential loss of exports after the country graduates from LDC status. But Nepal’s graduation from LDC status is inevitable. Therefore, amidst the ongoing debate on its relevance to the economy and impact on exports, it is urgent to start a dialogue on a strategy to counter the repercussions after graduation. As the umbrella organisation of the private sector, the FNCCI should take the lead in this regard.
Starting from exploring alternatives to the currently available preferential treatment, such as the EU’s GSP Plus scheme that offers additional trade incentives to developing countries, the FNCCI can search for the possibility of extending the transition period to give extra time to exporters to enhance their efficiency to compensate for the loss of preferential treatment. If not, there is the option of pursuing reciprocal bilateral free trade negotiations with preference-giving countries, and also mobilising international support for building the trade capacity before the time limit expires.