Nepal is in a transition period, graduating from LDC to a developing country, which is expected to be fully graduated by 2026. The transition from the status of LDC to developing has both positive and negative implications for the Nepali economy.
Positive Effects
- Socio-psychological effect of graduation
- Improve the image of the country in the global forums.
- Improve the credit rating of the country and encourage foreign investment.
- Promotes domestic investment due to improved economic status and market expansion.
- Improvement in domestic resources mobilization due to increased investment.
- Improvement in the competitiveness of Nepali industries and products to compete in the international market.
- Improvement in the trade governance due to mandatory compliance with multilateral regional agreements.
- Rationalization of government expenditure by prioritizing the use of domestic resources due to the lack of easy and concessional development financing.
Negative Effects
- Unable to have duty free, quota free market access provided to the LDC countries.
- Increase cost of external development financing being unable to enjoy concessional financing due to increased per capita income.
- Increase to compliance cost of the private sector in order to meet the standard WTO obligation.
- Unable to have technical and financial support such as study scholarship and capacity building training to the LDC members.
- Increase the fiscal burden to the government due to increased contribution in the budget of UN and other multilateral arrangements.
- Unable to get financial support for the Nepali delegates in the meetings/programs of the bilateral, regional and multilateral forums.
Effects of LDC Graduation in Nepalese Trade
The graduation of Nepal from the status of LDC to developing countries make Nepal ineligible to enjoy special and differential market access such as duty free-quota free, flexible compliance on trade related policies rules and procedure. This may have some negative implication in Nepal’s exports in the short run but in the long run Nepal may improve the supply capacity of the economy and enable to enjoy more benefits from foreign investment and trade.
There are different studies made by the government institutions and other independent studies have shown that there will not be serious negative impact on Nepal’s trade due to such graduation because Nepal did not have utilized the opportunities given by the global market to LDC member.
Though Nepal is a member of the WTO and other regional trade agreements, more than 60% of Nepal’s trade is with India which is governed by the bilateral trade treaty between Nepal and India. So, there will be no implication of such graduation in trade between Nepal and India.
Similarly, Nepal has made bilateral trade agreement with 17 different countries including India. The trade between them is governed by such bilateral agreement and the graduation of Nepal’s status may not have any serious implication on the trade between them.
For example, Nepal has bilateral trade agreement with China, USA, Bangladesh, UK etc. and Nepal’s trade with them is ruled by such bilateral agreement.
There will be some effect on Nepal’s export to the EU because as of the policy of EU, Nepal will not be able to have duty free quota free market access to the EU after graduation. However, Nepal’s export share to the EU is around 10–15% and the study conducted by WTO in 2020 has estimated that around 20% of export to EU may fall due to graduation. Since the share of EU in total export itself is 10–15%, and such 20% decline in export to the EU may not have significant impact on Nepal’s total trade.
Therefore, the graduation from LDC to developing country may have some negative impact in Nepal’s trade, but not significant under the given static analysis. But after graduation Nepal may be able to attract more foreign investment along with improved credit rating. These may improve our export competitiveness & capacity in the future and Nepal can benefit more from graduation.
Recommendation/Suggestion to Maximize the Graduation from LDC
The graduation from the status of LDC to developing country will bring opportunities and challenges both. In order to maximize the benefits from such graduation, Nepal should have a practical roadmap to address short-term, medium-term, and long-term issues.
In the short term
- In the short term or immediately after graduation, Nepal should request to extend transition period for few years in order to prepare the strong foundations of the developing economy.
- Similarly, conduct a vulnerability audit to identify the sectors and the products that will lose the preferential market access after graduation and diversify the market for such products through trade agreements with the possible market.
- Support to the exporters to enhance their compliance capacity and standard requirements as the product from developing countries.
In the medium term
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Similarly, in the medium term, the government should diversify the export basket by providing incentives to the new potential products such as IT sector, hydropower etc.
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Provide fiscal/monetary supports for the sectors vulnerable to the production through the incentives subsidized credit, tax refund to empower etc.
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Improve the logistic and reduce the cost of doing business to make Nepalese product more competitive.
In the long term
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In the long-run, the policies to sustain the competition of Nepali product focus on investment in human capital R & D and mega-infrastructures to cost reduction.
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Create investment friendly environment by securing life and property of the investor.
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Develop the special economic zone (SEZ) more private sector friendly to attract dependable secure investment.
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Improve the economic diplomacy through adequate training, capacity building for bargaining and negotiation skills to attract more FDI, foreign tourist inflow and export promotion.
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Prioritize bilateral relation to promote trade, investment, tourism and development financing.