Monday, 24 January, 2022

Graduation From LDC Status

Graduation From LDC Status

Hira Bahadur Thapa


Five decades ago, the General Assembly of the United Nations adopted a resolution to make a categorisation of its members based on their per capita Gross National Income (GNI) level, among others, designating 25 of them as the Least Developed Countries (LDC). This initial list of LDCs in 1971 included Nepal. The number peaked at 50 in 2003 and gradually it has come down to 46. Three LDCs from Asia are graduating from the category in 2026. It is an evidence of low-income countries progressing economically. Nepal, Bangladesh, and Lao People’s Democratic Republic are in the latest group of graduating LDCs within five years.

For the purpose of categorisation of LDCs, the Committee on Development Policy (CDP), a subsidiary body of the UN Economic and Social Council, has formulated certain guidelines. These are both for inclusion into and graduation from the category. Once categorised as LDCs having met the inclusion threshold, the LDCs are entitled to enjoy additional facilities compared to developing countries to enhance their economic capabilities. Such facilities range from trade to grants. The LDCs are granted free tariffs and quota-free exports of designated products. Not necessarily all countries around the world give such concessions to the LDCs. The European Union is at the forefront to provide such facilities to LDCs except on items like arms and ammunition.

Indeed, these special arrangements are meant to help these countries sustain economic development which are provided for a period until they gain economic sustainability to overcome the structural bottlenecks. The criteria for inclusion into LDC category are measured using key indicators which reflect long-term structural hardships the countries under review are facing. These indicators are chosen on the basis that they are methodically robust, maintain stability of criteria, ensure equal treatment of countries over time, and are frequently updated for all countries. They are periodically revised to reflect improved data availability and insights from new research.

Inclusion threshold
Inclusion threshold is primarily focused on GNI per capita. Whether a country is LDC is determined by calculating three-year average of the level of GNI per capita. The World Bank has defined the level of GNI per capita to categorise a country as LDC. LDCs are grouped as low-income countries. For the year 2021, such GNI per capita is fixed at US$ 1018. GNI per capita is calculated from national accounts data converted into USD using World Bank Atlas method to reduce impact of short-term fluctuations of exchange rate. The method to calculate a country’s GNI per capita is to divide GNI in US$ by the annual population of the country. Thus GNI per capita of a country varies depending on its population.

There are criteria for deciding LDCs’ eligibility to graduate from the category. In fact, the ultimate goal of the UN support system is to continue assisting them and finally create conditions in which they make notable progress especially in reducing poverty. Once the countries gain enough economic strength to withstand the severe structural handicaps on their march to sustainability, the UN committee undertakes a triennial review of country’s achievements evaluated against the set threshold of graduation.

According to the UN Secretary-General, LDCs have reduced poverty and implemented some structural changes. However, the gap between them and other developing countries has not narrowed nearly enough, confirming that they continue to face more severe obstacles to sustainable growth than other developing countries. The UN chief adds that the COVID-19 pandemic has laid bare the longstanding vulnerabilities of LDCs and it continues to unfold worldwide, jeopardises their development gains. The recent outbreak of a new variant Omicron further reinforces the view that no one is safe until everyone is safe and unfortunately current global vaccination campaign has hardly learnt this painful lesson.

Had Nepal not urged the UN to grant her extended transition in 2016, because of her genuine concerns for development imperiled by the consequences of 2015 earthquake, we would have overcome the psychological barrier of being the citizens of a poor low-income country in 2022. In one sense it proved to be an opportunity that was missed. Extending transition timeframe for graduating countries considering various difficulties confronted by the eligible countries has been a UN precedent.

Nevertheless, the latest triennial review (2021) of LDCs by the Committee on Development Policy found, based on statistical data from 2017-2019, that a growing number of these countries, including Nepal recorded notable progress against the graduation criteria, making them eligible for graduation from the category. A country is eligible for graduation from the LDC category if it meets two of the three graduation criteria, which include per capita GNI, the human assets index, and the economic vulnerability at two consecutive triennial reviews by the concerned committee of the UN. At the 2021 triennial review, the graduation threshold related to per capita GNI is set US$ 1222.

Eligibility for graduation from the category in 2026 for Nepal is confirmed by UN General Assembly resolution on November 24 this year. The standard time prescribed for transition is three years. Transition deadline has been extended to five years due to intense lobbying by Nepal and others to enable them to prepare for graduation while planning for a post-COVID-19 recovery and implementing policies and strategies to reverse the economic and social damage incurred by pandemic’s shock.

Nepal’s graduation will remove the negative perception that it is a high-risk country for foreign investment. It will also create conditions for Nepal to attract private foreign capital. Private lenders usually have hesitancy to lend in LDCs. With emergence as a developing country, Nepal’s international credit ratings will improve which will boost her chances of investment, so crucial to her sustainable economic development.

(Thapa was Foreign Policy Advisor to the Prime Minister from 2008-09.