Nepal is slated to be elevated to a developing country from a least developed country (LDC) in 2026. The United Nations has set down three major criteria to be eligible for promotion: (a) A per capita income of $1,222 or above, (b) A human assets index of 66 or above, and (c) An economic and environmental vulnerability index of 32 or below. Two other Asian countries—Bangladesh and Laos—are also poised to graduate in 2026.

For Nepal, the biggest fear after graduation is seeing its export trade being limited to India once LDC preferences are removed. Its trade diversification effort becomes more challenging because of potential shrinkages in export markets. The end of non-reciprocal preferences received through the Generalised System of Preferences in several countries is a crucial factor. The European Union’s “Everything but Arms” scheme is a prominent example, which extends duty-free access to all Nepali products. Furthermore, the LDC provisions in exports extended by the South Asian Free Trade Area will be removed. The LDC requirement for Rules of Origin is another example.

Foreign investment

Additionally, Nepal may come under surmountable pressure to rationalise its sensitive list as it has a longer list. Similarly, Nepal will lose LDC exemptions from some obligations, such as patents in pharmaceutical industries granted by the World Trade Organisation Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS). This could lead to more expensive products. However, the list of losses does not end there; exporting will become more difficult.

One frequently cited argument favouring LDC graduation is that a graduated country qualifies for more foreign direct investment (FDI). This logic may work as long as the FDI environment is highly conducive. However, Nepal, a country where policy and institutional reforms are placed on the back burner, lacks a sovereign credit rating, impairing its FDI prospects. Unless this is corrected, LDC graduation alone will not cause FDI inflows to increase.

LDC graduation will bring positive changes too. Primarily, it will boost national confidence and image on the international stage. But success will depend on a country’s efficiency in capitalising on graduation.

As per the Nepali work style, the vigour displayed during the initial phase soon dissipates and further progress slows down. When Nepal was readying to enter the World Trade Organisation, the euphoria was sky-high, but it rapidly faded after observing the embarrassing trade performance following accession. In 2003, the year preceding accession, the trade deficit was 12.85 percent of GDP. The trade deficit rose to 14.90 percent of GDP in 2005 and has been going up since then.

Second, Nepal is plagued by poor implementation. Since January 1995, they had been warning that the country’s readymade garment sector would lose duty-free, quota-based market access from January 1, 2005. The WTO’s Agreement on Textiles and Clothing took over the Multi-Fibre Arrangement in 1995, allowing a grace period for preferences until 2005. While some garment exporting countries bolstered their competitiveness during this period, Nepal watched its garment sector become history.

Nepal must consider several moves to prevent graduation from becoming a trade catastrophe. Upon graduation, a grace period for preferential market access can be obtained, but only with the EU and the United Kingdom for three years, provided Nepal fulfils stringent Rules of Origin requirements. Similar grace periods would require negotiations with other countries. Additionally, achieving the EU and UK’s GSP+ status demands a focus on export vulnerability.

Learn from Bangladesh

Pursuing new trade deals through Free Trade Agreements, Preferential Trade Agreements and Regional Trade Agreements is the best way forward, irrespective of the potential trade and tariff costs. In this regard, Bangladesh is an exemplary model. Their list of concluded and ongoing negotiations for Free Trade Agreements and Preferential Trade Agreements includes 23 countries and three regional alliances. Nepal should not delay in learning from its experience.

Similarly, the cost of being landlocked can be reduced through better trade facilitation to alleviate the impact of eliminated preferences. Addressing various supply-side constraints through trade capacity building requires greater attention. Lastly, revamping the investment climate should be the highest agenda without compromise.

An all-out effort assuring the country’s preparedness is still unseen. For a smooth transition, a comprehensive strategy is absent but utterly needed. Policy conflicts paralysing its prospects of implementation should come to an end. Graduating from the LDC status is a significant achievement, but this is no time to gloat. Ultimately, the question remains whether the benefits outweigh the losses.