Private sector seeks deferral, govt avers ‘no holding back’

Kathmandu, Nov. 30: The country that feels elated with erratic boosts in export backed by products flourished on customs arbitrage – such as palm and soyabean oil - is set to graduate to a ‘developing nation' from the 'Least Developed Country (LDC)' category after about five-and-a-half decades. But the private sector is dispirited with the epoch-making national ascendence. 

It has long been grumbling over the decision to graduate the country without strategies in place to support the business and industries in the post-November 2026 scenario. The country will lose preferential trade access and duty-free/quota-free access to the markets in developed nations. Garments, carpets, and textiles will be immediately affected as the application of tariff will increase their price and make them less competitive. Small and Medium Enterprises (SMEs) and women entrepreneurs will be most affected. The COVID-19 pandemic, economic slowdown during the past couple of years and Gen Z protests and business losses have shaken investor confidence, said Anjan Shrestha, Senior Vice-President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

"The private sector contributes more than 81 per cent to the country's Gross Domestic Product (GDP) and 86 per cent to the employment. If it loses confidence, entire economy will suffer," he said. 

According to Shrestha, Nepal needs to go for a review, in line with Bangladesh, and urge the UN to get three years' time for additional preparation. Bangladesh has decided to make a reassessment of the status of the economy to decide whether it is ready to graduate next year. 

He warned that graduating with the current economic situation would decrease Nepal's exports and its dependency on India would be further increased. 

Many businesspeople participating at a dialogue on LDC graduation organised by the South Asia Watch on Trade Economics and Environment (SAWTEE) in Kathmandu the other day demanded 'meaningful transition' with better preparation and maintaining support to the exporters and producers. 

They, including President of the Confederation of Nepalese Industries (CNI) Birendra Raj Pandey, said that the business community is in a situation where they continuously call for reforms and facilitations but the government doesn't respond to it or adopts piece-meal approach in addressing constraints. Meanwhile, the private sector is portrayed as 'fearful of the progress'. "It only means the private sector needs enabling environment to boost its confidence," said Pashupati Dev Pandey, President of Garment Association of Nepal.

Trade experts and economists have also voiced their concerns that Nepal's meagre export trade might face a serious blow with the raised duties across the developing and developed nations. 

In 2024/25, Nepal exported goods worth Rs. 277 billion – an astounding growth of 81.8 per cent compared to 2023/24 – which was 13.31 per cent of the total international trade. Nepal imported goods worth Rs. 1804.12 billion last year. 

But soya-bean oil (solely dependent on imported raw materials) occupied 38.5 per cent share in the total exports while the traditional products like carpets and cardamom that have steady trade were exported worth Rs. 10.7 billion and Rs. 7.7 billion, respectively. 

Govt should listen to vulnerable groups    

While the government maintained that the graduation means improving the image of the country with improved creditworthiness, access to broader commercial financing and empowered status to negotiate trade deals as a 'developing country', the private sector said that it is not ready and industries must be safeguarded from negative impacts.

This is the time to make proper assessment and move ahead with pragmatic policies and strategy. "I would like to make a note that no industries should suffer, there should be safeguards to save industries should there be any adverse impacts," said Gokarna Awasthi, Director General of the FNCCI. 

Stating that it was not the LDC status but policy and political instability and government inefficiency in creating better ‘doing business environment’ behind the poor flow of Foreign Direct Investment (FDI) into Nepal, he said, "Government should listen to the businesses that are likely to be most-affected and devise strategy accordingly." 

While studies have shown that Nepal's exports could drop by only 4.3 per cent due to the application of tariffs, producers said it will impact the labour-intensive business sectors – garments, textiles, carpets and handicrafts, and thousands of employments might be affected. 

Following the graduation, Nepal will lose any favour and leniency in compliance of rules and meeting deadlines, it has to strictly follow the international trade rules like any other developing country. 

 That means it will have to follow the rules on par with China and India. Industrial intellectual property and pharmaceuticals will be the most-affected. 

Being an LDC, Nepal is receiving a small fund in grants, LDC-specific funds, technical assistance and capacity building programmes, facility to travel to the United Nations events and is allowed to offer subsidies on the exports of agricultural products. Balram Gurung, President of Nepal Carpet Manufacturers and Exporters Association, said that every business sector is hesitating to invest and there is less interest in expanding business and production. 

He asserted that Nepal should seek deferral on the ground of immaturity in economy and international trade. "Europe and the USA are major markets for Nepali carpets. We must enhance the quality and find ways to be cost-effective. So, I recommend postponing it until we achieve competence," said Gurung. 

30% higher production cost 

The landlockedness, poor trade infrastructure, low-quality energy supply, low productivity of the workforce and less-advanced technology have their toll on the cost of production, 

making it higher by about 30 per cent compared to India and Bangladesh. Natural disasters, road obstructions and lack of lab facilities further push the cost up. 

Losing preferential treatment and duty-free quota-free entry to the developed markets would mean Nepali products will lose their competitiveness, and the market as well. 

Meanwhile, despite producers' continuous demand, the government hasn't addressed the customs-duty issues on raw materials and finished goods which, in case of some agriculture and health products, have almost similar rates. In the past several decades, inadequate efforts were made to create a robust trade infrastructure. The country needs world class laboratories, more dry ports, railway-lines for cargoes, air-cargo facility and cold stores. 

President of Federation of Export Entrepreneurs Nepal Govinda Prasad Ghimire said, "We must seek deferral for at least three years so that we could use the period to transfer technology and reduce the cost of production." 

Lagging behind peers

Nepal was one of the first 25 countries to be categorised as the LDCs in 1971, and was supposed to receive international support for being a vulnerable economy. But, in the last 55 years, the country's economy moved at a snail's pace with per capita income (PCI) of Nepali people increased by 20 times to reach US$ 1460 in 2025 from $70 in 1971.

Laos's PCI increased 41 times during the same period and reached $1970 from just $48, according to Laos Statistical Information Service. Likewise, the World Bank's data shows that Bangladesh's PCI in 2024 is $2593. This analogy is presented here because Nepal, Laos and Bangladesh are scheduled to graduate together next year. 

By 2021, Nepal had met two of the three criteria – the Human Assets Index (HAI) and Economic Vulnerability Index (EVI) – that would qualify a country to graduate from the LDC. The HAI assesses the status of health (such as life expectancy and child mortality), and education (such as adult literacy and school enrollment ratio), and EVI assesses the national economy's exposure to natural shocks – remoteness, drought, natural disaster and instability in agricultural production. In 2022, the Global Hunger Index reduced the level of hunger in Nepal from severe to moderate. But the country failed to meet the criterion on the PCI which is set at US$ 1,306 by the Committee for Development Policy (CDP). However, following the restoration of democracy, Nepal made significant achievements with poverty going down to 17 per cent in 2020, school enrolment rate reaching 94.5 per cent in 2024 and literacy rate reaching 77 per cent from 33 per cent in 1991. 

Private sector's failure? 

However, economists maintained that it was equally a failure of the private sector as well. While the country met the graduation criteria in three triennial reviews in 2015, 2018 and 2021, the 12th National Plan had formally adopted the vision to become a developing nation within two decades. 

The private sector is aware of the fact that Nepal sought a deferral in 2015 citing the devastating Gorkha Earthquake that year followed by a trade blockade by India. In 2021, the UN's Economic and Social Council (ECOSOC) officially endorsed Nepal's graduation with five-year preparatory period so that the impacts of the COVID-19 pandemic could be mitigated.  While Nepal already adopted a 'Smooth Transition Strategy (STS)' to make the graduation sustainable, the private sector claims that the government has just fulfilled its paperwork requirements. "No concrete steps have been taken to support the business and boost investors' confidence," they said. 

But Economist and Executive Director of the IIDS Dr. Bishwas Gauchan asked a question to the private sector - Why are we sticking to the low-morale naming the COVID-19 pandemic as a major culprit? "Besides, the private sector businesses should be focusing on innovation and benefitting from the transition. This game of blaming each other would take us nowhere," he said. 

According to him, since Nepal can't compete with China, India and Bangladesh with traditional products and services, it must find new opportunities in business and industries that are based on the geographical and resource-based realities. But the private sector and government both failed in taking any initiatives towards it, said Dr. Gauchan. 

Likewise, Joint Secretary of the National Planning Commission (NPC) – the focal agency for LDC graduation – Khom Raj Koirala said that since the triennial review of the LDCs would happen in 2027 and Nepal is set to graduate a year earlier, it would be wise to accept the realities and move ahead with preparations. "The government is aware of the multiple shocks experienced after deciding to graduate – earthquake in 2015 and multiple quakes thereafter, COVID-19 pandemic and recent Gen Z protests," he said. He tried to assure the businesses that the government is in close communication with Nepal's Ambassador to the United Nations. "If Bangladesh and Laos receive any facility or consideration, we can also demand it," said Koirala, while assuring that the government will take concrete steps to help the private sector in increasing competitiveness and productivity. 

Focus on technology, innovation

Former Vice-Chair of the NPC Dr. Min Bahadur Shrestha said that seeking deferral now is like deciding to stay in the same class at the time of graduating from it. 

However, according to former secretary of the government and Senior Fellow at SAWTEE Madhu Marasini, the situation is not as pessimistic as many think.  

"Let's not go for the deferral from the graduation, albeit there are chances to have a couple of additional years in transitional period after the graduation," he said.