Is Nepal Ready to Become a Developing Country?

In February 2018, the government of Nepal officially requested that the UN not consider Nepal for graduation from the least developed country (LDC) category in the 2018 Triennial Review. Nepal argued that graduation without fulfilling the per capita income criteria would not be sustainable.

In order to graduate from an LDC to a developing country, a state has to meet two of three criteria (benchmarks are set in terms of income, human assets, and economic vulnerability) in two consecutive triennial reviews to be eligible for graduation. The income criteria is judged based on gross national income (GNI) per capita. Nepal met set standards in terms of human assets and economic vulnerability (based on the Human Assets Index and the Economic Vulnerability Index) in two successive triennial reviews — 2015 and 2018 — and thus was eligible to be recommended for graduation. But Nepal did not meet the criteria in the income category. Should the UN agree to Nepal’s request, Nepal is likely to be recommended for graduation in 2021, rather than this year.

Trade, mainly exports, is a major area of concern for LDCs contemplating graduation, considering that the 47 LDCs’ share of global merchandise exports was only 0.97 percent in 2015. Nepal has a ballooning trade deficit, with an export-to-import ratio of 1:13 in FY 2016-17. The government is apprehensive that the withdrawal of preferential trade access after graduation would further worsen the trade imbalance. Existing preferential treatment for graduating LDC countries is discontinued after a brief grace period, usually about three years. According to Suyash Khanal, deputy executive director at the Trade and Export Promotion Center, around 85 percent of exports from Nepal are covered by “zero duty” preferential treatment. He predicts significant market erosion in the United States, the European Union, and other countries, including Australia, Canada, Japan, and Turkey, with the loss of LDC-specific preferential treatment.

Nepal’s graduation will, however, not impact its largest export market: India. Zero tariffs are applicable on most Nepali exports to India as per the Nepal-India Trade Treaty of 2009. The bilateral provision will not be affected by Nepal’s graduation. Nepal had an export concentration of 57 percent to India alone in FY 2016-17. Likewise, the Ex-Ante Impact Assessment, prepared by the UN Department of Economic and Social Affairs (UN DESA) in 2018, states that textile and apparel products and carpet exports among the current exports will be impacted by the increase in tariffs while diversification into new markets will be constrained by higher tariff rates imposed after graduation.

There is also optimism surrounding Nepal’s graduation process with the argument that it would promote self-reliance in development. Rajan Sharma, the advisor to the Commodity Council of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), says, “After graduation, Nepal’s export to the EU should follow similar path as the tuna export from the Maldives to the EU.” Indeed, the Maldives faced a similar export dilemma as Nepal, considering its tuna fish export concentration to the EU at the time of graduation, which stood at 40 percent by value in 2011. The Maldives lost its duty-free, quota-free access to the EU under its Everything But Arms (EBA) preferential treatment scheme in 2014, three years after its graduation from LDC status. However, its export of tuna remained relatively stable even after graduation. The country was able to mitigate the risk posed by loss of preferential treatment through market diversification to alternative markets, which include the United States and Thailand, and promoting its tuna as a niche premium product. On the issue of market erosion, Sharma adds, “We need to identify niche markets and increase the competitiveness of products through marketing.”

Unfortunately, Nepal is yet to make the most of trade preferences and the country has not yet built its productive capacity as reflected in its small and undiversified export basket. On the other hand, its South Asian partner Bangladesh, which is also an LDC, has built a vibrant garment industry through the utilization of similar preferential treatment. “Nevertheless, Nepal still has got around six to nine years to build [a] productive base, increase export volume, diversify its market, and build competitiveness, before it loses the preferential market access,” says Gauri Pradhan, the global coordinator of the least developed countries’ civil society network organization, LDC Watch. Besides, international support is crucial in ensuring that the graduation becomes smooth and irreversible. According to Pradhan, developed countries and development partners should be flexible with the grace period provided to graduating countries with regards to the expiry of the preferential market access provision.

In the end, minimizing the adverse impact of graduation depends on Nepal expanding its export basket and increasing its market access based on market research, product quality, branding, and negotiation skills. On a positive note, graduation will enhance the country’s image in the international market and its credit rating, which can be used to develop a brand in its exports as well as to garner investment in other sectors, mainly tourism and hydropower.