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 the cost of external development financing being unable to enjoy concessional financing due to increased per capita income.
- Increase in compliance costs of the private sector in order to meet the standard WTO obligation.
- Unable to have technical and financial support, such as study scholarships and capacity building training to the LDC members.
- Increase the fiscal burden to the government due to increased contribution in the budget of the 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 on Nepalese Trade
The graduation of Nepal from the status of LDC to a developing countries make Nepal ineligible to enjoy special and differential market access, such as duty-free-quota-free, flexible compliance with trade-related policies, rules, and procedures. 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 be able 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 a serious negative impact on Nepal’s trade due to such graduation because Nepal has not utilized the opportunities given by the global market to LDC members.
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 agreements with 17 different countries, including India. The trade between them is governed by such a bilateral agreement, and the graduation of Nepal’s status may not have any serious implications for the trade between them.
For example, Nepal has bilateral trade agreements with China, the USA, Bangladesh, the UK, etc., and Nepal’s trade with them is ruled by such bilateral agreements.
There will be some effect on Nepal’s export to the EU because, as per the policy of the 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 exports tothe EU may fall due to graduation. Since the share ofthe EU in total exports is 10–15%, and such 20% decline in exports to the EU may not have a significant impact on Nepal’s total trade.
Therefore, the graduation from LDC to a developing country may have some negative impact on 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 an improved credit rating. These may improve our export competitiveness & capacity in the future, and Nepal can benefit more from graduation.
Recommendations/Suggestions to Maximize the Graduation from LDC
The graduation from the status of LDC to a developing country will bring opportunities and challenges. 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 the transition period for a few years in order to prepare a 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 for products 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 the IT sector, hydropower, etc.
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Provide fiscal/monetary support for the sectors vulnerable to production through incentives, subsidized credit, tax refund, etc.
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Improve the logistics and reduce the cost of doing business to make Nepalese products more competitive.
In the long term
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In the long-run, the policies to sustain the competition of Nepali products focus on investment in human capital R & D and mega-infrastructures for cost reduction.
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Create investment friendly environment by securing the 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 relations to promote trade, investment, tourism, and development financing.
Other Notes