Ashish Shah is director at the International Trade Centre (ITC) and currently looks after the Division of Country Programmes. Prior to joining the ITC, he worked first at the International Labour Office in Geneva and then at the United Nations Conference on Trade and Development. Shah is a member of the EIF (Enhanced Integrated Framework) Board, to which he brings more than 20 years of international and United Nations experience in the field of trade promotion and development. His experience in providing strategic advice on trade development issues and engaging in high-level policy dialogues with stakeholders in Africa, Asia and the Arab region has been put at the service of the least developed countries (LDCs) to develop and diversify their export bases. In an email interview with the Post, Shah talks about Nepal's challenges and opportunities as the country is scheduled to graduate from LDC by 2026 and the ICT's plans to support it during the transition. Excerpts:

What brings you to Nepal?

I am in Nepal, one of my favourite countries, to launch the Nepal Pashmina Sector Export Strategy 2022-2026. The strategy is the result of excellent collaboration between the Ministry of Industry, Commerce and Supplies of Nepal, the European Union, the pashmina sector and the ITC, a joint agency of the United Nations and the World Trade Organisation dedicated to increasing the international competitiveness of small and medium enterprises (SMEs).

The ITC has been providing technical assistance to Nepal for over 25 years. Through my visit, I would like to reaffirm the ITC’s continued commitment to help Nepal, a landlocked LDC, in connecting to regional and global value chains and in increasing its export competitiveness. This is particularly important now that Nepal is scheduled to graduate from the LDC status by 2026. We are fully committed to supporting Nepal in this process of transition as well as during the post-graduation phase.

Being an LDC meant Nepal got preferential treatment; but after 2026, it will have to go it alone. What will Nepal lose when it graduates to middle-income developing country?

Belonging to the LDC category means that the country benefits from duty-free, quota-free access for its exports granted by multiple markets. It also benefits from certain preferential provisions laid out in different WTO Agreements. For example, LDCs are given more time to comply with certain WTO Rules. LDCs are also beneficiaries of special Aid for Trade support from development partners who focus their aid on LDCs. Upon graduation, the LDC loses these benefits. However, graduating from this category is recognition of the positive development path travelled by the country and should be seen as something positive. These losses are offset by many new trade and investment opportunities once the country graduates from the LDC status.

Nepal became an LDC in 1971, and this was meant to be a temporary phase in its national development. After remarkable progress in recent decades, especially with respect to the human assets and economic vulnerability criteria, it was agreed in 2021 that Nepal would graduate from the LDC category by the end of 2026.

According to a recent ITC study done in collaboration with the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS), Nepal could lose 4.3 percent of projected exports because of tariff changes when it graduates in 2026. The removal of preferential tariffs will especially affect the apparel, synthetic textile fabric and carpet sectors. Losses will mostly occur in exports to China, the European Union and Turkey.

It is crucial that Nepal makes the most of this preparatory period and puts in motion strategies that secure a sustainable transition out of the LDC category.

Graduation means losing a host of international support measures. How should Nepal prepare for this?

We believe that possible losses in export revenues after graduation can be offset through targeted responses. They include using trade promotion to tackle hurdles that prevent the realisation of export potential, facilitating market and product diversification, and pursuing better market access conditions.

Our analysis shows that after graduation, unlocking the full export potential of apparels to Japan, beauty products and perfumes to China, and carpets to Canada could offset the losses expected for those markets and sectors. Targeted trade promotion that enables companies to overcome current bottlenecks–such as non-tariff measures, rules of origin requirements or specific consumer preferences in the target market–can help realise the export potential of these sectors and markets.

Several sector-market combinations will face a drop in exports without having enough space to counter this decline through trade promotion. However, alternative markets are available with sufficient untapped export potential, turning market diversification into a promising strategy to balance out graduation-induced trade losses. A good example of this is the case of exports of synthetic textile fabrics to Turkey, expected to fall by $14 million on the one hand, but where there is an untapped export potential of $8 million to Bangladesh and $8 million to India, on the other. Actions targeted to overcome obstacles that may hinder these exports to Bangladesh and India should therefore be explored.

A major implication of LDC graduation is the loss of preferential market access. How will it affect Nepal’s trade performance as exports will face tariff increases?

With graduation, Nepal will move from the unilateral tariff preferences for LDCs granted by 25 markets to the next best available regime. As a result, the average trade-weighted tariff will rise from 1 percent to 2 percent, but the increase will vary widely between sectors. The vegetable products sector and the cereals and cereal products sector will face the largest increases in tariffs, with 27 percentage points and 25 percentage points in average applied tariffs, respectively.

Our study finds that tariff increases will reduce projected 2026 exports to $1,313 million from $1,372 million–a loss equivalent to 4.3 percent of total projected exports. Among Nepal’s main export destinations, projected exports to India and the United States are likely to remain largely unaffected, while projected exports to other top trade partners will suffer losses between 17 percent and 33 percent.

Reports say that in the EU, the tariff may increase by 5.7 percent if Nepal becomes ineligible for its GSP+. How should Nepal deal with increasing tariffs?

The non-reciprocal preferential tariff scheme for LDCs of the EU–the Everything But Arms initiative–provides a transition period of three years for graduating countries. During that time, Nepal will continue to benefit from duty-free, quota-free market access to the EU. After the transition period, Nepal will be eligible for the EU’s Generalised Scheme of Preferences (GSP) for developing countries. Nepal could also eventually qualify for the EU’s extended, more generous GSP system, GSP+.

To do so, Nepal would have to fulfil the vulnerability criteria, reflecting a non-diversified economy and low import shares into the EU, and implement 27 international conventions on labour rights, human rights, environment protection and good governance. According to our projections, in the case of the most affected sectors of exports to the EU, pursuing the GSP+ status would almost completely counterbalance graduation losses.

In this regard, capacity building of public officials in raising awareness of GSP and GSP +, trade negotiations, and trade policy formulation would be crucial. The ITC, through the EU-Nepal Trade and Investment Programme, has been already supporting the government of Nepal in this area and is ready to expand its support further.

It seems that the impact is expected to fall predominantly on SMEs as they represent the bulk of exports to LDC-specific preference-granting countries. What are the measures that Nepal should adopt to protect SMEs?

Product diversification would create a large export potential that Nepal needs to focus on. Diversifying exports from a narrow range of agriculture and low-value-added manufacturing products to high-value-added industrial products would certainly compensate for the trade losses.

Similarly, shifting institutional focus and public and private resources into natural resource-based products such as glacier/mineral water, agro-food products and medicinal and aromatic plants (MAPs) products would contribute to additional exports. Another potential area that may have considerable impact on export promotion would be shifting towards the production of higher-value services by increasing investment in the ICT sector and in sustainable tourism and promoting e-commerce. Targeted trade promotion of particular products in the international markets also promises to compensate the trade losses.

Graduation will also impact official development assistance. What should Nepal do to ensure that funding for critical infrastructure projects is not affected?

Although Nepal will lose international support measures focused specifically on LDCs, we need to keep in mind that there will be continued support from them to address development related challenges. Donors do not only support LDCs, but there is a large packet of support from them to low-income countries as well. Countries like Pakistan, Kenya and Iraq are good examples of countries which are not LDCs but continue to receive support from donors to address their development-related challenges. Moreover, given Nepal’s development trajectory, it is important that it becomes less dependent on ODA and focuses on trade as a means to boost economic development.

Evidence of past graduating countries shows an increase of ODA in graduating LDCs than in other LDCs. This may reflect greater absorptive capacity, geographical priorities, and desire to invest in more rapidly developing countries. Most of the ODA in graduating LDCs went to economic infrastructure and less to social sectors as compared to other LDCs. Similarly Aid for Trade also grew more in graduating countries. It seems unlikely that graduation will significantly affect the outlook for ODA above and beyond global ODA trends.