Nepal’s graduation from Least Development Country (LDC) status will impact development cooperation modestly only, according to a research report “Nepal’s graduation from the LDC category: Implications for international trade and development cooperation”.
The impact on development cooperation will be modest as most of the development partners – multilateral and bilateral – have indicated that LDC status is not the main criterion for aid flows, concludes the study conducted by South Asia Watch on Trade, Economics and Environment (SAWTEE) to investigate the implications of graduation for Nepal in the areas of market access, development cooperation, and trade-related policy space. As, the motive of the study was also to offer recommendations in these areas for the government to consider when formulating the transition strategy, the study highlights that Nepal could lose access to specific instruments and funds dedicated exclusively to LDCs, particularly with regard to climate change-related funds, after a transition period.
Some development partners may switch from grants to concessional loans or increase interest rates for concessional loans, it reads, recommending that the government should explore new forms of finance, including blended finance, public-private partnerships, private philanthropies and co-financing, among others, and work with development partners for new forms of support mechanisms such as dedicated funds for graduated countries, disaster insurance, and technology transfer mechanisms.
Nepal is scheduled to graduate from the LDC category in 2026. While this is an important milestone in Nepal’s development journey and a testament to its achievements in socio-economic progress, Nepal’s exit from the category will result in the loss of a variety of international support measures that the international community has provided to help Nepal overcome development-related challenges. The government is also in the process of formulating a transition strategy to ensure smooth, sustainable, and irreversible graduation.
The study has also suggested that graduation from LDC status will have trade implications in terms of higher tariffs and more stringent rules of origin provisions in preference-granting countries. The projected loss in total exports emanating from the increase in tariffs is moderate, it reads, adding, however, the loss emanating from more stringent rules of origin, while uncertain, could be significant, especially in the garments sector.
The study has also recommended the government to aspire to become a party to the more generous preferential schemes such as the EU’s Generalised System of Preferences Plus (GSP+) and the UK’s GSP Enhanced Framework, while studying the implications of acceding to the additional conventions that Nepal needs to ratify to qualify for these schemes. “Nepal should also initiate dialogue with other trading partners seeking an extension to LDC-specific concessions and preferences for another 3-5 years following graduation,” it reads, adding that Nepal should lobby for lenient rules of origin (RoOs) for LDCs for a period sufficient for the private sector to adjust to the new RoOs. “To realise the untapped export potential of Nepal, the government should prepare trade strategies, in consultation with the private sector, to strengthen the overall competitiveness of the economy, upgrade exporter’s capabilities, diversify export products and markets, simplify and streamline processes to attract more foreign direct investment and encourage enterprises to participate in regional, global value chains.”
Likewise, the graduation could result in a loss of policy space, either through the loss of current flexibilities and special treatment, such as in the area of intellectual property rights, or through greater scrutiny of certain practices, such as the subsidy regime, the study reads, adding that the policy space to promote infant industries and exports, and pursue public health objectives, could be squeezed.
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