Since 1971, Nepal has been classified as a Least Developed Country (LDC) by the United Nations. The UN defines an LDC as a nation with low socio-economic development indicators, characterized by low income, inadequate healthcare and education systems, weak human assets, and high economic and environmental vulnerability.

Nepal is on track to graduate from the LDC category to developing country status in November 2026. To qualify, a country must meet two of the three criteria—Gross National Income Per Capita (GNI PCI), Human Assets Index (HAI), and Economic and Environmental Vulnerability Index (EVI). Nepal met two of these criteria in 2015 and 2018 and surpassed them again in 2021. However, the COVID-19 pandemic provided a five-year grace period to ensure a sustainable transition. While Nepal has consistently met the HAI and EVI requirements in the last three evaluations, it has yet to fully meet the GNI PCI requirement.

As of December 2024, there are 44 countries in the LDC group. These nations face similar challenges, including poverty, hunger, education gaps, climate change vulnerability, gender inequality, political instability and economic underdevelopment. The primary goal of LDC graduation is to uplift people from deprivation, enhance human rights, and ensure sustainable development and global peace. To support this, the UN, along with international forums and agencies, actively collaborates with LDCs and developed nations, fostering a culture of shared growth and development.

Trade and Economic Development

Trade plays a crucial role in boosting a nation’s economic health and driving GDP. By expanding industries, enterprises, SMEs, tourism and the overall economic structure, trade stimulates economic activity. Increased trade generates employment, fosters GDP growth and directly contributes to a rise in Gross National Income Per Capita (GNI PCI). Additionally, trade enhances national income through taxes, revenues, tariffs and export earnings. This can be reinvested in critical sectors like health and education, thereby improving the Human Assets Index (HAI).

Trade also strengthens agriculture’s contribution to GDP, promotes export sustainability and supports disaster-affected populations through state and non-state governance. These efforts collectively reduce economic vulnerability

Preparedness for LDC Graduation and Trade Facilitation

Nepal has been actively preparing for a smooth transition post-LDC graduation, with a particular focus on export promotion. The Constitution of Nepal, under Article 51(d), emphasizes strengthening the national economy through import substitution and export promotion, encouraging both domestic and foreign investment. To ensure a sustainable transition, the National Planning Commission has formulated the LDC Graduation Smooth Transition Strategy 2024 (STS). This strategy outlines Nepal's transition plan, focusing on six strategic pillars:

1. Macro-economic stability and fiscal sustainability

2. Trade and investment

3. Economic transformation and productive capacity

4. Climate change and disaster risk management

5. Social inclusion and integration

6. Governance and institutional development

Four committees operate at federal and provincial levels for effective implementation of this strategy. They include:

● High-Level LDC Graduation Steering Committee, chaired by the Prime Minister

● LDC Graduation Implementation and Coordination Committee, chaired by the NPC Vice-Chairperson

● LDC Graduation Monitoring and Evaluation Committee, chaired by the NPC Secretary

● Provincial-Level LDC Graduation Implementation Committee, chaired by the Chief Minister

The International Development Cooperation Policy 2019 emphasizes mobilizing Official Development Assistance (ODA) to support graduation, aiming to achieve middle-income country status by 2043 and the Sustainable Development Goals (SDGs) by 2030. The 16th National Plan aligns policies and programs with LDC graduation and SDG implementation.

Additionally, the Nepal Trade Integration Strategy 2023 has set ambitious targets - increasing the trade-to-GDP ratio from 48.1% in 2021/22 to 55% in 2027/28 and boosting the export ratio from 6.3% to 20% during the same period.

Beyond domestic efforts, Nepal has strengthened bilateral and multilateral trade agreements, including a trilateral power agreement with India and Bangladesh, enhanced connectivity through BBIN (Bangladesh-Bhutan-India-Nepal) and BRI (Belt and Road Initiative) projects, and improved rail and water routes. Nepal has also increased its participation in WTO frameworks and hosted the Third Nepal Investment Summit to position itself as an attractive investment destination.

Impact of LDC Graduation on Trade

Nepal has struggled to fully leverage the benefits offered by the WTO as an LDC. For example:

● Despite 100% duty-free facilities for LDCs, Nepal engages in only 1% of total trade with nations like Norway and Australia.

● Post-graduation, Nepal could face export losses of 14% with China and 8% with Turkey, though these countries account for only 3% of Nepal's total trade.

● Nepal’s largest trade partner, India, operates under a bilateral agreement that is expected to remain stable post-graduation.

● Regarding bilateral assistance, Nepal receives over 90% of total aid through bilateral relations, mainly from India, China, the UK, the USA, Switzerland and Norway. Since most foreign aid flows through political and economic cooperation rather than LDC-specific benefits, it is expected to remain largely unaffected post-graduation.

However, Nepal will lose several benefits, including:

● Preferential market access and special treatment under WTO rules

● International support measures (ISMs) and trade-related technical assistance

● Concessional loans and financing options

The International Trade Centre (ITC) in 2022 projected that Nepal’s exports could decline by only 4.3% due to increased tariffs post-graduation. However, Nepal’s Smooth Transition Strategy 2024 has outlined measures to offset this potential decline.

The Way Forward

While LDC graduation may initially result in a 4.3% export reduction, Nepal has multiple opportunities to mitigate these effects through strategic planning and reforms. Key areas for action include:

1. Investing in Human Capital: Nepal must prioritize education, health and vocational training to develop a skilled, motivated and competitive workforce. The success of China’s post-1978 economic growth, driven by human capital investment, offers a valuable model for Nepal.

2. Balancing Geopolitical Interests: With 60% of trade reliant on India and China’s growing influence, Nepal must adopt a neutral, pragmatic trade approach. Market studies should identify niche products for local Nepali branding, and trade routes should be diversified to reduce dependence on any single country.

3. Resource Mapping and Development: Nepal must invest in natural resource mapping to identify and capitalize on opportunities in hydropower, minerals, precious metals and fuels.

4. Reducing Foreign Aid Dependence: With an absorption capacity below 61%, Nepal must shift from reliance on foreign assistance to sovereign wealth fund investments in productive sectors. The country’s foreign reserves exceed Rs 2,100 billion, enough for 15.1 months of imports, providing a strong foundation for this transition.

5. Overcoming Transit Challenges: As a landlocked country, Nepal faces 40% higher transit costs, violating the Convention on the Law of the Sea. Alternative strategies, including digital trade, technological innovations and policy reforms, should be pursued to counter these disadvantages.

6. Strengthening Global Partnerships: Nepal should enhance South-South cooperation for knowledge and technology exchange while maintaining North-South cooperation to leverage existing development partnerships.

Conclusion

Nepal should implement a strategic action plan to ensure a sustainable and competitive post-LDC economy. By strengthening trade infrastructure, improving product quality and aligning with industrialized economies, Nepal can enhance economic resilience and ensure a successful transition from LDC status.

(Raut is currently serving as an account officer in Birgunj Metropolitan City.)

(This opinion article was originally published in  April 2025  issue of New Business Age Magazine.)