LDC Graduation Debate

As Nepal continues to struggle to find its feet in terms of stability, its economy is not aloof from the shadow of political turbulence. Political stability is essential for the desired level of economic progress. However, Nepali society is shaken not only by the political upheavals but also by natural calamities like earthquakes, floods and landslides, as well as pandemics such as COVID-19.  These negative factors have crippled the Himalayan nation's sustained efforts to achieve inclusive prosperity. With the recent Gen Z movement, Nepal is grappling with another economic dilemma – whether or not to graduate to developing nation from the Least Developed Nation (LDC) status. The country is going to join the club of developing nations in November next year after five-and-a-half decades, but here are two lines of thought regarding the graduation.

The government considers that the country should not seek more time for graduation, but the private sector insists that Nepal still lacks the required economic conditions, strategies and technological innovation to deal with the post-graduation phase. The country will accrue new economic benefits after shedding its status as an LDC. Its international standing and creditworthiness will be enhanced and foreign investors will see the country as a reliable destination for investment. In addition, it will gain much-needed confidence to pursue economic diplomacy and diversify its economy while improving its competitiveness. 

The business community argues that the country will lose preferential trade access and duty-free/quota-free access to markets in the developed nations as it transitions to a developing nation. Its major export items, such as garments, carpets, and textiles, will lose their competitive edge with the new tariff, with a loss of export trade by 4.3 per cent. Small and Medium Enterprises (SMEs) and women entrepreneurs suffer a lot. The country will be deprived of LDC-specific benefits such as access to concessional loans and grants. Its dependency on remittances and India will increase. Due to the weak productive capacity and low confidence of the private sector, the country will become prone to external shocks. 

As an LDC, Nepal receives LDC-specific funds, technical assistance and capacity building programmes, and subsidies on the exports of agricultural products. Given that the private sector contributes more than 81 per cent to the country's Gross Domestic Product (GDP) and 86 per cent to job creation, its concerns must not be overlooked.  Nepal should focus on improving the business environment, industrial policy and trade infrastructure. The production cost of Nepal's export goods is still higher by 30 per cent compared to India and Bangladesh due to landlockedness, poor trade infrastructure, low-quality energy supply, low productivity of the workforce and less-advanced technology, according to a news report of this daily.

The government and private sector should sit together to find a common ground on this matter of significant importance. The idea of seeking a review in line with Bangladesh and asking the UN to get three years for additional preparation is not bad. Bangladesh is now evaluating its economy to decide whether it is prepared to graduate next year. No doubt, there should be a meaningful transition with adequate preparation and support to the export industries. The peace-meal approach does not work. The authorities must pay heed to reforms and facilitations as raised by the business sector. The initiatives should be taken to create a better business environment to boost foreign direct investment, business growth and employment generation. The state should adopt strategies to protect the export enterprises from the negative consequences once it achieves the status of a developing nation.