Nepal must prepare a transition strategy in cooperation with trade and development partners to avoid adverse impacts from the country’s graduation from least developed country status as it risks losing preference treatment after graduation, a government report says.

While preparing the transition strategy, Nepal also needs to conduct a fresh review of the scheduled graduation plan considering the impact of the impact of the Covid-19 pandemic, the report titled “Nepal Human Development Report 2020: Beyond LDC Graduation: Productive Transformation and Prosperity” states.

The report was prepared by the National Planning Commission and the United Nations Development Programme, and was unveiled early this week.

“The Covid-19 pandemic may have profound impacts on the graduation criteria, with new risks of rising trade and export costs impacting external markets, and the need for more concessional aid, including debt relief, to overcome multiple crises,” the report says. “All of these factors may require a fresh review of the scheduled graduation plan while developing a transition strategy.”

Graduation from least developed country (LDC) status becomes effective three years after the United Nations General Assembly takes note of the recommendation made by the Committee for Development Policy under the United Nations Economic and Social Council to graduate a country. This means Nepal’s graduation will be effective in 2024, if the committee recommends graduation at its next triennial review in 2021.

In the last two triennial reviews conducted in 2015 and 2018, Nepal had met two of the three criteria related to human asset index and economic vulnerability index. It couldn’t, however, meet the per capita income criterion.

According to the United Nations, the gross national per capita income of a country needs to be at least $1,222 for it to be accorded developing country status. At present Nepal’s per capita income is $1090, according to the World Bank.

A country becomes eligible to graduate from LDC after meeting two of the three criteria. But, Nepal had requested for postponement of graduation considering the impacts of the deadly earthquake in 2015.

But, opinion is divided on whether the country should seek graduation in 2024 considering the impact of Covid-19 pandemic.“The impact of the pandemic on economic growth in the last fiscal year and the current fiscal year has nullified economic growth achieved in the past few years and growth is expected to remain subsided in the next one/two years,” said Shankar Sharma, former vice-chairman of National Planning Commission.

“It means, there will hardly be any growth in income. So, disadvantages for the country after being graduated, outweigh the advantages. So, I think, there is no need to hurry for graduation.”

Nepal’s economy is projected to have grown by just 2.7 percent in the last fiscal year, as per the Central Bureau of Statistics. The World Bank in October projected that the economy could grow by as low as 0.6 percent in the current fiscal year.

Sharma, also a senior economist, said that the country should not rush to graduate from LDC until the country makes significant progress in per capita income. “Currently, we don't have any manufacturing and service industry that is strong like the pharmaceutical, garment and information technology related industries in Bangladesh,” he said.

“Until we see continuous substantive growth in foreign direct investment in the country and income level rises substantially, it is better not to graduate to developing country status,” Sharma said.

According to the report, the direct cost of graduation is moderate at least for the short to medium term as no larger impact on exports is foreseen.

But it says that there are possibilities of reduced exports in some markets due to high tariffs, and access to funds created specifically for the LDCs will be adversely affected.

Particularly, funding from the United Nations group is expected to go down although aid from multilateral donors like the World Bank and the Asian Development Bank as well as aid from most bilateral donors is not expected to be impacted.

For example, the United Nations Development Programme and United Nations Children Fund have targets to allocate 60 percent of their core resources to the LDCs. Nepal would also not be given access to programmes dedicated to least developed countries by organisations such as the World Meteorological Organisation, International Telecommunications Union and Universal Postal Union after graduation.

Nepal also will have to face loss of preferential market access and increased competition in international markets. This would disproportionately impact export-oriented small and medium enterprises and employment generated by them. In particular, export to the European Union, which provides duty and quota free market access under its “everything but arms” policy, could be affected badly. Exports to the European Union could decline by as much as 57 percent due to erosion of the preference, the report says.

The legal obligation of fully implementing the Trade Related Intellectual Property Rights (TRIPs) Agreement may negatively affect access to medicine, and in turn. health care, according to the report.

“Despite such added costs, graduation makes countries more creditworthy by international credit rating agencies, thus improving access to commercial finance,” the report says. “Graduation from the LDC category would transmit a positive message to the global community about Nepal’s development prospects. It can be branded as a potentially competitive destination for foreign direct investment inflows and other private investment.”

Posh Raj Pandey, former member of the National Planning Commission and trade expert, said the country should be ready for graduation in 2024 as the risks posed by graduation are manageable. “We have to prepare a transition strategy to manage the potential risks from erosion of market access and preferential treatment in financing,” he said. “We still can get the majority of the facilities through bilateral negotiation with trade and development partners.” Almost all the countries that have graduated from LDC since the early 1990s had prepared a transition strategy, according to the report.

According to Pandey, the country can retain all the existing facilities until 2027 under the United Nations’ norms if the country graduates to a developing country in 2024. “We can prolong the facilities that are vital for us, based on negotiations with trade and development partners,” Pandey, also a co-author of the report, said.

He also stressed that the country needs to enhance its productive capacity to tackle potential loss of preferential treatment from trade and development partners. The government also has not yet considered requesting the United Nations Economic and Social Council to suspend Nepal’s graduation in 2024. “Despite the Covid-19 pandemic, our priority is still to graduate from LDC in 2024,” Min Bahadur Shahi, member of the National Planning Commission, told the Post earlier this week.