Nepal’s upgrading to developing nation and challenges

Nepal's current burning issue is related to the upgradation to a developing country. In this, the United Nations (UN) determines a developing country based on national income, human capital, and economic and environmental risks. If the criteria for any two of these three indices are met, the UN upgrades the country to a developing country. According to the latest criteria of the UN, the national income should be 1306 US dollars, the human capital index should be 66 points, and the economic and environmental risk index should be less than 32 points. Nepal achieved the criteria for the human capital index and the economic and environmental risk index long ago. Despite low economic growth and widespread instability, Nepal showed great eagerness to upgrade to a developing country.

The target for upgrading was brought closer to 2026 from 2030, following countries like Myanmar and Laos, but while moving the target closer, Nepal did not seem to have paid attention to its economic capacity and stability. After 2025 September’s Gen-Z movement, concerns have been raised on delaying Nepal’s LDC graduation as the country’s economy is facing obstacles to take regular pace.

At the time of the upgrading process to a developing country, Nepal had not yet achieved the national income standard and Nepal became the first country to embark on this process without achieving that standard.

The UN will upgrade Nepal to a developing country in November, 2026, but by the present day, Nepal has already achieved the national income standard, the main reason for which seems to be the demographic factor. The 2011 census estimated Nepal's population growth rate at 1.35 percent, while the 2021 census estimated that the growth rate had decreased to 0.92 percent. The main reason for the increase in national per capita income was the decrease in population growth rate, and the contribution of Nepal's economic capacity and stability to growth remained low.

Nepal has generally been achieving marginal economic growth of 3.5 to 4.5 percent, which is why Nepal is ranked as a low-income country in terms of development. Nepal has not progressed from marginal economic growth with a major economic transformation to high economic growth, and our post-COVID recovery has also been very slow, as evidenced by the 3.9 percent economic growth rate in the last four years.

Comparatively, Nepal's economic capacity and stability do not seem to have changed much from what they were three decades ago. Due to the deterioration of the situation in sub-Saharan African countries, Nepal's position in the world development rankings has risen slightly (from the last five to the last twenty-five), which cannot be said as the result of Nepal's own efforts and Nepal has no reason to be proud of it. Whether Nepal can be upgraded to a developing country without strong economic capacity has become a topic of debate.

The argument that Nepal's image in the international community will remain high after upgrading in a developing country may be correct in one sense, but we must also consider how much the reality of Nepal matches that argument.

Nepal has lagged far behind in making the best use of its existing potential and creating opportunities in the domestic and foreign markets by developing an investment-friendly environment. Due to the political instability that flares up from time to time in Nepal, as well as legal complexities, weak productivity, skill shortages, high costs, policy ambiguity, procedural complexity, and other reasons, it has not been able to mobilize domestic and foreign investment in large quantities and introduce new technologies to promote the market. Without proper resolution of these issues, upgrading in a developing country alone does not seem to keep Nepal's image in the international community high, and unless Nepal matures its economic diplomacy, it cannot grow rapidly.

 Nepal's agricultural exports were satisfactory until the eighties, but now we are dependent on food imports. The industrial sector had risen somewhat with the economic liberalization of the 1990s, but it slowed down due to instability and has not been able to rise again. The contribution of industry to the gross domestic product is 13 to 15 percent, while that of mining is 2 percent. The contribution of the non-agricultural sector to the gross domestic product was 45 percent four decades ago, but it is currently 78 percent, but this transformation has not achieved high economic growth.

Due to the lack of stability in the country, millions of young Nepali are forced to migrate to other countries, including the Gulf, for employment every year, without seeing a bright future in Nepal, and the remittances from them have helped balance the high trade deficit. Nepal's remittances account for 25 percent of its gross domestic product, and Nepal is among the countries with the highest ratio. Remittances have played a major role in reducing poverty in Nepal, but the question arises whether reducing poverty through remittances is a long-term solution. Human capital contributes to economic development and increases economic capacity and stability, but in Nepal, where millions of young people go abroad for employment every year, others take more economic benefits from Nepal’s human capital than Nepal itself.

It is also necessary to analyze Nepal's human capital. There has been progress in the development of education in Nepal, but there has been no progress in terms of skilled manpower and high morale, which is indicated by the 110th place occupied by Nepal in the world skill development ranking. Nepal has lagged behind in developing skills according to the demands of the internal and external labor markets and producing skilled manpower, which has remained a weakness in human resource development.

A large number of Nepalese people migrate abroad to work in low-wage, low-skilled jobs, so Nepal does not benefit from the indirect brain gain that is seen in other countries. Nepalese people migrate abroad for higher education and some high-level jobs, but most of them do not return to Nepal. There is an informal presence of many foreign workers in Nepal's labor market, the main reason for which is the lack of skills among Nepali workers. Thus, maintaining remittances as the main basis for driving the economy may not be fruitful for long-term stability and this increases the risk of a major economic crisis in the country. If this situation continues in Nepal, unlike other countries, the growth of human capital does not contribute significantly, directly or indirectly, to the strong rise in economic capacity. Therefore, it seems that the criteria and bases for human capital and national income determined by the United Nations for upgrading in developing countries have not been able to accurately assess the reality.

Nepal, which has adopted a policy of export promotion along with economic liberalization, has not been able to show its strong presence in the world market because it has not paid attention to export-oriented production by utilizing the existing potentials and has not promoted them. Nepal seems to have been partially successful in establishing export markets for only a few goods and services, that too with various other countries’ assistance. The rest seems to be exported as if Nepal had sold goods in the Hatt market. Therefore, Nepal has not been able to expand exports and establish value chains by connecting with the international market. Nepal's current exports are limited while imports are high, which is why the ratio of high trade deficit to gross domestic product is 35 percent. An analysis has been made of the impact on exports currently held after upgrading in developing countries, according to which it has been concluded that there will be no significant impact on current exports. However, along with this, it is also necessary to analyze what opportunities and challenges will be added in expanding exports by utilizing currently untapped potential and what opportunities and challenges will be added in expanding exports by utilizing emerging sectors.

Additionally, the bilateral trade agreement of Nepal with India, primary trading partner, does not take into account Nepal’s potential graduation from Least Developed Country (LDC) status. If mutual understanding between two countries remains the same even after Nepal transitions to a developing nation, significant issues will not arise. However, India has diplomatic and geopolitical leverage over Nepal so there is a high possibility of India exploiting the situation if Nepal graduates without a strong economic foundation.

Before Nepal can be upgraded to a developing country, it must have the capacity to improve education and skill development, properly mobilize human capital, including external and internal investment, and focus on export-oriented production by making the best use of the country's potential and emerging sectors, and modify and promote it according to the demands of the international market. Otherwise, Nepal will not be able to upgrade and benefit from the international market. Nepal cannot compete with the latest technology, technology, entrepreneurship, professionalism, and skills of high and middle-income countries, and Nepal's exports will be limited to what they currently have.

Nepal has made marginal gains by sending a large number of people abroad for low-wage, low-skilled employment. But at the same time, the current shortage of people will increase due to the decline in population growth rate increasing dependence on foreign labor, which will not be able to increase the marginal economic growth achieved so far. If Nepal continues to be upgraded to a developing country at present stage, we will not be able to reach middle-income status and will fall into the lower-middle-income trap.

Nepal certainly needs to upgrade to a developing country, but for that, it must institutionalize good governance by making the best use and mobilization of means and resources, and achieve a high rate of economic growth of 7 to 9 percent in the next ten years moving up from lower middle-income to middle-income then only will Nepal become a developing country. It would be in the country's best interest to accelerate the process of upgrading Nepal to a developing country only after its national income reaches $3,000. If the current situation continues and the country is upgraded, there is a strong possibility that it could fall into a lower-middle-income trap and face an economic crisis.