Nepal is set to graduate from its Least Developed Country (LDC) status by 2026, and the International Trade Centre (ITC) is a key partner in supporting Nepal during this transition. Ashish Shah , Director of ITC's Division of Country Programmes, was recently in Nepal. Before joining ITC, Shah worked at the International Labour Office in Geneva and the United Nations Conference on Trade and Development (UNCTAD). With over 20 years of experience in international trade promotion and development, he also serves on the board of the Enhanced Integrated Framework (EIF). Mukul Humagain of New Business Age sat down with Shah to discuss Nepal's challenges and opportunities as it approaches LDC graduation, as well as ITC’s plans to support the country through this crucial transition. Excerpts:

You’ve been to Nepal twice in the past two years, with your last visit in February 2023. What brings you back this time?

I’m here to wrap up the EU-Nepal Trade and Investment Programme that ITC has been implementing. Additionally, I’m meeting with key donors, including representatives from the US, UK, and Norway, who have supported our efforts.

Are you satisfied with the outcomes of the Trade and Investment Programme?

Yes, I’m very pleased with the results, and our beneficiaries are equally satisfied. At the closing ceremony, many of them shared how the programme has positively impacted their businesses and livelihoods. We’ve achieved significant results in two sectors: pashmina and coffee.

The coffee sector, while still small, has great potential. We focused on upgrading the supply chain and supporting farmers, especially women, by training them in good agricultural practices. Improving quality has been a major focus, as high-quality coffee is essential to meeting market demands.

In the pashmina sector, we developed a strategy and supported the establishment of Nepal’s first fiber-processing plant for Chyangra Pashmina. This will allow exporters to source yarn locally, reducing dependency on imports from India and China. This is a major milestone, as it enables the local production of shawls and scarves. We've also worked closely with the government, particularly on issues related to Nepal's LDC graduation.

As Nepal prepares to graduate from LDC status in 2026, how has ITC supported the country in preparing for this transition?

There’s significant work to do to ensure a smooth transition, and ITC has been closely collaborating with the Nepali government on capacity-building and developing a comprehensive transition roadmap. One key area we’ve focused on is strengthening the negotiation skills of government officials. These skills will be vital as Nepal seeks to maintain its trade benefits and international partnerships post-graduation. While there’s still work to be done, we’re pleased with the progress so far and remain committed to supporting Nepal during this critical period.

There is both apprehension and anticipation surrounding Nepal's LDC graduation. As an LDC, Nepal has enjoyed preferential treatment, but post2026, it will face stricter rules under WTO and FTA agreements. What will Nepal lose as it transitions to a middle-income developing country?

Currently, Nepal benefits from special preferential treatment as an LDC, with 25 countries offering LDC-specific tariffs, including the EU under the Everything But Arms (EBA) initiative. After graduation, Nepal will lose this preferential status, which will have some impact. As part of our project, we conducted a study that shows Nepal could lose some export markets, particularly in sectors like synthetic textiles and carpets. However, the overall impact is not expected to be overwhelmingly significant.

While the textile and apparel sectors will face challenges, I view Nepal’s graduation as a positive development—it signals that Nepal is becoming a more resilient and promising economy. Although some exports may experience setbacks, there are steps the government can take to mitigate these impacts and attract more investment.

Do you think the government is well-prepared for the post-2026 transition? Was the five-year transition period sufficient?

The transition period is a hypothetical question, but a three-year period is considered sufficient for this kind of transition. Nepal has known since 2021 that it will graduate in 2026, and preparations have been underway since then. While there’s always more that can be done, three years is typically the maximum time needed for such a transition. Nepal has a transition roadmap with over 160 specific actions, and the private sector is actively engaged in this process.

Despite the challenges faced by a landlocked country, I am confident that the government can manage the transition. While the loss of international support measures such as grants and aid will pose challenges, donors and development partners are likely to continue providing "aid for trade" funds to graduating countries. This ongoing support will help strengthen Nepal's economy, establish a solid commercial foundation, and attract further investment.

What measures can the government take to mitigate the potential negative impacts of LDC graduation?

There are several steps the government can take, and while it’s a complex task, it is certainly achievable. First, Nepal must recognize that this transition requires careful preparation, which I believe they are already aware of. The government can learn from other LDCs that have successfully navigated this process.

Key steps to offset potential export losses include:

1. Enhancing Trade Promotion: If Nepal loses access to certain markets, it should look for new buyers in the same regions. Strengthening trade promotion will be critical in opening new markets.

2. Market Diversification: Nepal should expand its focus beyond the EU and target markets in Japan, South Korea, China, Turkey, the UAE, and neighbouring India. Diversifying export markets is essential for reducing reliance on a few key destinations.

3. Product Diversification: Nepal needs to broaden its export base to reduce dependency on a limited range of goods. New sectors such as digital services, aromatic and medicinal plants, machinery, tourism, cement, and steel present significant potential for export growth.

4. Regulatory Reforms: The government will need to adjust the regulatory framework to align with WTO standards. Nepal will no longer benefit from special provisions for LDCs, so it’s crucial to update regulations to remain competitive in the global market.

5. Boosting Private Sector Competitiveness: As Nepal loses duty-free, quota-free access to certain markets, it’s important for the private sector to adapt and enhance its competitiveness. ITC’s support in areas such as trade policy and trade facilitation will help prepare sectors like pashmina and coffee for the post-graduation period.

What role will global trade bodies like ITC play in supporting Nepal after its LDC graduation?

ITC sees tremendous potential in Nepal, which is why we have supported its graduation process. However, we understand that our assistance must extend beyond graduation. We’ve been working with Nepal for over 25 years and will continue to support SMEs, export sectors, business associations, and policymakers in the long term.

Nepal has significant export potential, estimated at $9.2 billion, but it currently exports only $1.3 billion. Our role will be to help Nepal unlock this potential by expanding its export base, strengthening its economy, and creating a more conducive environment for the private sector.

The sectors identified in ITC's study align with Nepal's National Trade Integration Strategy (NTIS) 2022-2023. The key will be to prioritize a few core sectors—Nepal can’t compete in 50 different areas. ITC is focusing on identifying 5 or 6 sectors where Nepal can emerge as a key player. Digital services and IT, for instance, show great promise.

It’s been two decades since Nepal joined the WTO. Do you believe Nepal has benefited from its membership?

Joining the WTO in 2004 was a strong signal to the world that Nepal is committed to multilateralism, open markets, and global trade. While progress since then has been slower than expected, the long-term benefits of WTO membership will be significant, opening doors to more opportunities in global trade.

Given the loss of various international support measures post-graduation, shouldn’t Nepal focus on making its FDI regime more competitive?

Foreign Direct Investment (FDI) and trade are closely linked—you can’t boost trade without attracting investment. To grow trade, it’s essential to foster investment, and a more open, competitive FDI regime is key. While there are risks associated with opening up too quickly, many countries successfully attract foreign investors by offering incentives for specific sectors or imposing certain ownership restrictions. Without a steady flow of investment, Nepal’s trade prospects could be limited.

(This interview was originally published in   December 2024 issue   of New Business Age Magazine.)