Nepal's anticipated graduation from the Least Developed Countries (LDC) category by November 2026 marks a significant milestone in its development journey. This achievement reflects the country's progress in economic growth, human development, and resilience. However, this transition presents a complex array of challenges that, if not carefully managed, could threaten the very gains that have brought Nepal to this pivotal point.
LDC graduation is determined by three principal indicators: Gross National Income (GNI) per capita, the Human Assets Index (HAI), and the Economic and Environmental Vulnerability Index (EVI). These indicators collectively assess a nation's economic, social, and structural vulnerabilities. In the 2024 Triennial Review, Nepal's per capita GNI was estimated at approximately $1,300, just shy of the graduation threshold of $1,306. Although external challenges like the COVID-19 pandemic and global crises hindered Nepal from meeting the GNI threshold in 2024, the country's EVI score of 29.6 and HAI score of 76.3 both meet the criteria for graduation.
GNI per capita is a critical indicator of a country’s economic strength and the average income of its citizens. Nepal's near attainment of the GNI threshold reflects its economic growth over recent decades, driven by sectors such as agriculture, remittances, and tourism. However, this figure does not fully capture the uneven distribution of income within the country. Economic growth in Nepal has been concentrated in urban centers like Kathmandu, leaving vast rural regions grappling with poverty, limited access to basic services, and inadequate infrastructure. These disparities highlight concerns about the inclusiveness and sustainability of Nepal's economic progress.
The Human Assets Index (HAI) measures education and health status, serving as a proxy for human capital development. Nepal's improvement in this area underscores its efforts to expand access to education and healthcare. Yet, challenges remain. The quality of education varies widely across regions, with literacy rates and school enrollment significantly lower in remote mountain and hill regions compared to the more developed Terai belt. Similarly, healthcare access is uneven, with rural areas suffering from a lack of facilities, trained personnel, and essential medicines. While Nepal's HAI score is promising, these persistent disparities must be addressed to ensure long-term development.
The Economic and Environmental Vulnerability Index (EVI) reflects a country’s susceptibility to external economic shocks and environmental challenges. Nepal's vulnerability is particularly pronounced due to its location in a seismically active zone, its reliance on climate-sensitive sectors like agriculture, and its dependence on external markets for remittances and exports. Frequent natural disasters, such as earthquakes, floods, and landslides, compound these vulnerabilities. The impacts of climate change, including unpredictable weather patterns and increased frequency of extreme events, further threaten Nepal's economy and the livelihoods of millions. Although Nepal meets the EVI threshold, its underlying vulnerabilities call for a comprehensive approach to disaster risk reduction and climate resilience.
Strategic Imperatives for Transition
The process of LDC graduation is a multi-step journey, beginning with a recommendation from the Committee for Development Policy (CDP) and culminating in approval by the United Nations General Assembly. During the 3 to 5 years this process typically spans, the graduating country must prepare to transition away from LDC-specific support measures it has long relied on.
Loss of Preferential Market Access: One of the most significant challenges post-graduation is the loss of preferential trade arrangements. Nepal currently enjoys duty-free and quota-free access to key international markets, including the European Union and the United States, under the Everything But Arms (EBA) initiative and the Generalized System of Preferences (GSP). These arrangements have given Nepali exporters a competitive edge, particularly in textiles, carpets, and agricultural products. Graduation will erode these preferences, potentially making Nepali goods less competitive due to higher tariffs and stricter market entry requirements. The loss of special provisions like the services waiver and flexible rules of origin could further exacerbate challenges for Nepal’s exporters, leading to a decline in exports and adversely affecting the balance of trade, employment, and economic growth.
To mitigate these risks, Nepal should negotiate extensions of these preferences and explore alternative trade agreements to cushion the impact of graduation. Engaging in dialogue with key trading partners, including the European Union and the United Kingdom, to secure access to the GSP+ and GSP Enhanced Framework will be crucial. Additionally, Nepal should seek extensions of LDC-specific concessions from other preference-granting countries and lobby for lenient rules of origin to give its private sector time to adjust to the new realities. Trade facilitation measures, including streamlining customs procedures and enhancing logistics infrastructure, will also be essential in maintaining Nepal’s export momentum.
Shift in Concessional Financing: As an LDC, Nepal has benefited from access to concessional financing from multilateral institutions, including the World Bank’s International Development Association (IDA) and the Asian Development Bank (ADB). Post-graduation, Nepal’s access to such financing will diminish, leading to an increase in the cost of borrowing for development projects. This shift could strain public finances, particularly in the context of Nepal’s existing debt obligations. The government will need to explore alternative financing mechanisms, such as tapping into international capital markets or enhancing domestic revenue generation, to sustain its development agenda.
The reduction in concessional financing will necessitate a reassessment of Nepal’s fiscal strategy. The government may need to increase its reliance on domestic revenue generation to finance development projects, which could involve broadening the tax base and improving tax administration. However, this must be balanced against the need to avoid placing an excessive burden on the private sector and households. Additionally, Nepal will need to carefully manage its debt levels to avoid the risk of debt distress, particularly considering the increased cost of borrowing post-graduation. Strengthening public financial management and ensuring the efficient use of resources will be key to maintaining fiscal stability.
Impact on Development Assistance: Graduation may also impact the flow of bilateral aid and Official Development Assistance (ODA) that Nepal receives from bilateral and multilateral donors. The Enhanced Integrated Framework (EIF) under the World Trade Organization (WTO), which provides aid for trade to LDCs, may no longer be available. This could have significant implications for Nepal's ability to finance its development programs, particularly in areas such as infrastructure, education, and health. Although donors have increasingly focused on aligning their aid programs with national development priorities, the shift from LDC status could lead to a re-evaluation of Nepal’s eligibility for certain types of aid.
Proactive engagement with development partners will be crucial to securing continued support, particularly in areas critical to achieving the Sustainable Development Goals (SDGs). Nepal should explore new forms of finance, such as blended finance, public-private partnerships, and private philanthropy, to fill the gap left by the reduction in aid.
Transition Strategy and International Support: To mitigate the potential adverse impacts of graduation, Nepal has developed a comprehensive smooth transition strategy. This strategy focuses on strengthening productive capacities, enhancing resilience to external shocks, and ensuring that the benefits of development are equitably distributed. The Nepalese government has aligned this strategy with its 16th periodic (five-year) plan, identifying specific activities that address the loss of LDC-specific support measures, capitalize on new opportunities, and mitigate structural challenges and vulnerabilities. The United Nations offers a smooth transition process, which includes continued support for a few years post-graduation. Nepal should actively engage with the UN and other international bodies to secure this support, which could include technical assistance, capacity-building, and access to alternative trade arrangements.
Nepal must adopt a strategic approach that addresses the challenges while capitalizing on the opportunities presented by this transition. Reducing reliance on a narrow range of export products and sectors by diversifying the economic base is essential. This includes promoting industrialization, enhancing value addition in agriculture, and developing sectors such as tourism, information technology, and renewable energy. Economic diversification will help mitigate the impact of losing preferential market access and create new opportunities for growth and employment. Likewise, investing in education and skills development is critical to enhancing Nepal’s human capital. Improving the quality of education, expanding access to vocational training, and aligning educational outcomes with labor market needs will be vital. A well-educated and skilled workforce is essential for driving innovation, productivity, and competitiveness in the post-graduation economy.
Effective governance and strong institutions are crucial for managing the complexities of the post-graduation transition. Nepal must focus on enhancing public administration, improving service delivery, and fostering transparency and accountability. Strengthening governance will ensure that policies are effectively implemented and that the benefits of development are equitably distributed. Building strong institutions will not only support the transition process but also lay the foundation for sustained development in the post-graduation era. Nepal should continue to engage with international partners to secure support for its development agenda. This includes seeking technical assistance, capacity-building, and access to alternative trade arrangements. Strengthening regional cooperation, particularly within South Asia, will also be important for enhancing economic integration and resilience.
Nepal's impending graduation from LDC status is a pivotal moment that signifies both progress and the need for strategic foresight. As the country navigates the complex transition away from LDC-specific support measures, it must focus on strengthening its economic foundations, addressing deep-rooted social disparities, and building resilience against external shocks. By pursuing economic diversification, enhancing human capital, and fostering inclusive growth, Nepal can transform the challenges of graduation into opportunities for sustainable development. With effective governance and continued international cooperation, Nepal has the potential to not only secure its post-graduation future but also set a precedent for other nations on the path to economic maturity.
Economics