Nepal’s Journey Towards LDC Graduation

Nepal's Least Developed Country (LDC) status can be viewed from three perspectives: potential graduation, achieved graduation in certain criteria, and the ongoing process of reaching formal graduation by November 2026. According to the United Nations, LDCs are defined as countries with low-income levels, struggling with poverty, and limited economic and social development. Graduation from LDC status is a significant milestone, marking a nation's progress towards self-reliance and improved living standards. In 1971, Nepal was included in the LDC group, although it has been struggling hard since its inception. 

Nepal's graduation from LDC status presents both opportunities and challenges. While it signifies progress, Nepal will need to address certain risks before and after graduation to ensure sustained social and economic development. With two years remaining until graduation, careful consideration of the pros and cons is crucial. Nepal's efforts should be directed towards maximising the benefits of graduation.

Graduation offers a multitude of benefits, both tangible and intangible. Tangible benefits are obvious in areas that meet the criteria for graduation. These include the expected rise in human capital, improved resource utilisation, reformed governance, and economic development. These form the foundation of the tangible benefits. Additionally, the increased value of the country on the world stage is crucial. Intangible benefits include a boost in national confidence, access to global resources and platforms, and increased international recognition.

These tangible and intangible benefits can be a strong pull factor for foreign investment, technology transfer, and access to economic forums. Graduating from LDC is a significant milestone for a country, but experts emphasise that it's not a final destination. Further efforts are needed to sustain the progress achieved. The risk of returning to LDC status is a real concern if a country fails to maintain its development trajectory during the post-graduation transition period.

Graduation from LDC status also presents challenges, particularly regarding potential losses. Let's consider Nepal's situation. Foreign aid is a major concern. Nepal has relied heavily on grants for development since the beginning of its periodic plans. In recent years, a significant portion of the budget has been filled by foreign aid. For instance, in fiscal year 2080/81, foreign aid was expected to contribute 15 per cent of the budget, consisting of 12 per cent of foreign loans and 3 per cent of grants.

Nepal faces a significant resource gap in its pursuit of the Sustainable Development Goals (SDGs). Foreign aid currently plays a crucial role in filling this budget deficit. However, graduation from LDC status is likely to reduce concessionary loans and grants, potentially hindering Nepal's economic and social development endeavours. 

Trade facilitation is another important area of potential loss after graduation. As an LDC, Nepal enjoys various trade benefits, like duty-free quotas and zero tariffs. These benefits might be reduced or eliminated after graduation, potentially exacerbating Nepal's existing trade deficit, which currently stands at a significant percentage of GDP. To mitigate this challenge, Nepal will need to increase efforts to address the trade gap after losing these benefits. A smooth and gradual graduation strategy, as outlined by the National Planning Commission (NPC), is crucial to minimising the impact. The private sector development strategy of the country is also crucial.

Effective mitigation measures require strong coordination between the government and non-governmental sectors. Plans and programmes for sustaining the benefits of LDC graduation should be aligned with our existing periodic plans, incorporating coordinated programmes across all three tiers of government, effective fiscal transfer strategies, and robust monitoring and evaluation mechanisms.

To achieve this, a comprehensive analysis of both the positive and negative impacts of graduation is necessary. This analysis should include an assessment of potential losses Nepal might face, particularly in the trade sector. It should also consider export volume, trading partner strategies, and import dependence. According to the Nepal Rastra Bank report, over 60–70 per cent of total trade volume is with India; in 2079/80 the export and import volumes were 67.9 per cent of total exports and 63.8 per cent of total imports, respectively. In this regard, the trade deficit volume is also significantly higher with India. Nepal's trade imbalance with India necessitates new bilateral trade facilitation negotiations. Additionally, exploring bilateral trade agreements with other countries is also important. The Generalised Scheme of Preferences Plus (GSP+) agreements with the European Union could be more beneficial.

Regarding aid, even minimal amounts might be challenging to absorb due to Nepal's limited absorption capacity. For instance, in fiscal year 2080/81, merely 3 per cent of the total budget was expected from grants; more than this, realisation and utilisation are always under expectation. This suggests that the volume of aid itself may not be the most critical factor. Diversifying our focus beyond traditional aid sources might be more beneficial. Notably, aid from the Asian Development Bank (ADB) and the United States of America (USA) is likely to continue even after graduation. For concessional and long-term loans, Nepal can prioritise and go through bilateral agreements. 

A critical aspect of the post-graduation strategy should be focused on the elements of graduation criteria set by the Committee for Development Policy (CDP). These criteria encompass three main sectors: the gross national income (GNI) threshold, the economic vulnerability index, and the human assets index. While all three are important, the latter two (economic vulnerability and human assets) play a particularly crucial role. The GNI threshold is directly influenced by improvements in the other two areas. For example, enhancing human assets and implementing measures to reduce economic vulnerability will naturally lead to an increase in people's income, positively impacting the GNI threshold. 

The post-graduation strategy should prioritise improvements in the Human Assets Index (HAI) and Economic Vulnerability Index (EVI). For the HAI, investments in healthcare, quality education, food security, emotional intelligence, ethical values, and national integrity are crucial. Economic enhancement requires structural adjustments across various sectors, including agricultural reforms, agricultural modernization, industrial policy enhancement, skill development programmes, sustainable natural resource utilisation, disaster risk reduction strategies, and capitalising on the demographic dividend. Additionally, strengthening the rule of law, promoting innovative and effective governance, and developing global governance strategies are essential. Wise negotiation in aid and trade, robust corporate governance, and fostering a socially responsible private sector are also critical. 

While Nepal's GNI per capita (GNI) of $1027 (as of the 2021 triennial review) hasn't yet met the income threshold for graduation was $1222 in 2021 and is set at $1306 for the 2024 review.  To boost income-generating activities, the government should focus on establishing small and medium enterprises (SMEs) and encourage the creation of startups. Additionally, investing in large infrastructure projects and industries should be a primary goal to drive economic and social development. Leveraging talents can enhance human development, stimulate economic activity, and significantly increase national income, ensuring the country’s continued progress as a developing nation after graduation. 

(An MBA from International University of Japan, Bhattarai now works at the Ministry of Defense.)