Nepal’s LDC Exit Scenario and Strategic Pathways for Transition

Nepal is scheduled to graduate from the Least Developed Country (LDC) category on 24 November 2026 along with Bangladesh and Lao PDR. While public discourse has largely centered on whether Nepal should seek deferment, the more substantive national conversation must shift toward ensuring that graduation is smooth, strategic, and sustainable. Graduation is not merely a ceremonial milestone; it is a structural economic transition that will redefine Nepal’s engagement with the global economy. The question is no longer simply whether Nepal should graduate, but whether it is institutionally and economically prepared to manage the post-LDC landscape.

Nepal’s Graduation Process

The LDC category is reviewed every three years by the Committee for Development Policy (CDP), which reports to the United Nations Economic and Social Council (ECOSOC). Graduation eligibility is determined based on three criteria: Gross National Income (GNI) per capita of US$1,306 or above, the Human Assets Index (HAI) should be 66 or above, and the Economic and Environmental Vulnerability Index (EVI) should be 32 or below.  However, countries that meet two of the three criteria in two consecutive triennial reviews become eligible for graduation from the category.

Nepal was among the first 25 countries designated as LDCs in 1971. As of January 2025, 44 countries remain in the category, with 32 in Africa, 8 in Asia, 3 in Oceania, and one in Latin America and the Caribbean. Among them, 14 are in graduation process and 8 countries have been graduated so far. LDC comprise around 15% of the  global population but accounting for only 1.4% of global GDP and 1.1% of global merchandise trade, the disparity  illustrates structural marginalization of LDC economies in the global system.

Nepal first met graduation eligibility in 2015. Despite being eligible again in 2018, the country deferred the process due to the devastating 2015 earthquake. It was rather quite extraordinary that with a per capita income (of $745 in 2018) as low as just 40% of the graduation threshold level of per capita income (of 1,230), Nepal

Became eligible for graduation. The next triennial review in 2021, by CDP showed further improvements in both HAI and EVI, and Nepal appeared to be set to graduate. However, in light of the COVID-19 pandemic circumstances, Nepal was granted an extended preparatory period of five years. Hence, Nepal is set to graduate from an LDC status on 24 November 2026, after a transitional period of five years. Nepal is the only country amongst all the graduated countries as well as countries with graduation eligibility (which are likely to graduate by 2021), secured graduation requirements without fulfilling the per capita GNI threshold criterion. Nepal’s graduation score at 2024 Triennial Review were EVI at 29.7, HAI reaching 76.3 and GNI at $1300 slightly below graduation threshold of $1306. However, according to the 2025 UN monitoring report, Nepal’s per capita GNI has reached US$1,404, exceeding the threshold. Now, statistically, deferment is difficult to justify, however, structurally, vulnerabilities remain.

Potential Implications of Graduation 

Erosion of Trade Preference: Perception vs. Reality

As an LDC, Nepal enjoys duty-free, quota-free access to the EU under the Everything But Arms (EBA) initiative, along with special concessions from the UK, Türkiye, Canada, Australia, and Russia, exporting major commodities such as garments, carpets, and handicrafts. The International Trade Centre estimates a 4.3% decline in exports due to preference erosion—modest compared to other graduating countries. Studies shows such losses to Lao PDR at 7.3%, and Bangladesh around 14% of its export, indicating higher use of facilities from those countries than Nepal. However, EU provides a three-year transition period after graduation and Nepal can apply  for GSP+ status, which maintains duty-free access in exchange for implementing 27 international conventions on  governance, labor, environment, and human rights.

Furthermore, historically over two-thirds and recently over 80 percent of Nepal’s exports go to India under the  Indo-Nepal Treaty of Trade, which provides duty-free access irrespective of LDC status. Thus, graduation will have minimal impact on Nepal’s largest export market. Nepal’s total goods exports constitute just 7 percent of GDP, and manufacturing value-added remains around 5 percent, according to studies. Production costs are estimated to be 30% higher than in India due to logistics inefficiencies, high input costs, weak quality systems, limited finance access, and technological lag. Overcoming those impediments is key for export enhancement rather than revolving around loosing trade preference.

Shrinking Policy Space and WTO Obligations

Second impact will be on significant loss of policy space in supporting various domestic sectors as LDCs are often exempt from making commitments and implementing stringent provisions of WTO. Pharmaceutical sector which enjoys benefits under TRIPS waiver in the form of ability to produce and export patented drugs without the need to comply with patent/license requirements may be impacted. On the other hand, Nepal has amended required policies, applied tariffs at much lower bound rates, made a commitment to phase out all ODCs (other duties and charges within 10 years from the entry into the WTO in 2004), has already stopped use of export subsidies, and indicates policy space was lost much before the LDC graduation. More than that, the 13th WTO Ministerial Conference (MC13) in February 2024, members approved a “smooth transition” package for graduating Least Developed Countries (LDCs), allowing them to retain specific LDC technical assistance, training, and certain special and differential treatment (S&DT) provisions for three years after graduation to mitigate potential trade disruptions.

Development Finance: Income Classification Matters More

As we know Nepal has been receiving foreign assistance from both bilateral donors such as OECD countries,  India, China, Japan and multilateral agencies such as World Bank, Asian Development Bank (ADB), International  Monetary Foundation (IMF), the European Union institutions, United Nations, etc. and Official development  assistance (ODA) has remained vital to Nepal’s budgetary framework. However, the share of external financing in the national budget has gradually declined from over 28% in 2016/17 to 14.6% in 2025/26, indicating gradual fiscal transition already underway. Aid from OECD countries, LDC climate change fund (LDCF) and Enhanced Integrated Framework (EIF) funds will be impacted. India and China, major bilateral ODA contributors, doesn’t directly link aid with LDC status. The patterns and trends in aid allocation suggest that recipient countries’ historical and bilateral relationships with donors, and country-specific situations such as civil wars and unrests, natural disasters, refugee crisis, etc. are important determinants of aid inflows.

Crucially, most concessional lending is determined by income classification definition of World Bank, such as low-income countries (LICs), lower-middle-income countries (LMICs), etc. not LDC criteria. Nepal has recently graduated from LICs (the per capita income threshold of US $1,335) to LMICs and the World Bank has already increased its annual loan interest from 0.75% to 1.5%. This shows LDC graduation will have partial impact on most of ODAs for Nepal. 

Strategic Preparations and the Smooth Transition Strategy

Nepal has developed a Smooth Transition Strategy (STS), 2024 built around six pillars: macroeconomic stability, trade and investment, economic transformation, productive capacity, climate resilience, and social inclusion. The strategy outlines 167 actions aligned with the 16th Five-Year Plan. However, policy formulation has historically outpaced implementation. Effective execution, coordination among ministries, and budget alignment remain critical challenges.

Structural Vulnerabilities and Emerging Risks

Nepal’s graduation will be taking place amid rising global protectionism, financial instability, and intensifying climate risks. Externally, shifts in US and EU trade policies, Free trade agreement between India and EU, request for LDC graduation deferral by Bangladesh may further undermine the export competitiveness of Nepali products and erode market share.

Nepal is among the most climate-vulnerable countries globally, particularly due to its mountainous terrain and socio-economic circumstances. Recent climate-induced disasters like the 2024 monsoon events and projected threats such as glacial lake outburst floods (GLOFs) are expected to triple by the end of the century. 

Recent political instability and economic disruptions have dampened investor confidence. Growth forecasts have  been revised downward by World Bank to 2.1% from 5.2%, 3 to 3.5 percent from 5.2 by IMF, Nepal Statistics  Office first quarter estimate of around 3% against targeted growth rate of 6%, reflecting weakened private sector  morale and uncertainty. Additionally, Nepal’s placement on global AML/CFT grey lists has negative implications for foreign direct investment inflows and financial credibility. Domestically, Nepal faces structural economic fragility, with heavily dependent on remittances, stagnant industrial output, insufficient job creation to absorb youth entrants. 

Conclusion and Recommendation

Nepal’s graduation reflects decades of progress in education, health, and institutional development. It enhances international credibility and may improve investor perception. Yet graduation alone does not guarantee transformation.

Nepal should request for at least 3 years of extension of final preparatory period, and there is the case of Solomon Islands being extended by three years, until 13 December 2027 for the second time. However, any extension must be treated as a final preparation window—not a comfort zone.

The path forward requires:

● Prompt implement of Smooth Transition Strategy (STS), 2024, 

● Optimum use of LDC specific foregone opportunities if granted extension,

● Aggressive pursuit of EU GSP+ status,

● Strengthened trade diplomacy and make alliance with landlocked countries and explore facilities,

● Rapid exit from AML/CFT grey lists,

● Improved governance and creditworthiness,

● Investment in logistics, digital trade, and industrial upgrading,

● Climate adaptation financing and green transformation,

● Structural reforms to boost productivity and job creation.

Ultimately, graduation must be felt by citizens through higher incomes, stable employment, and resilient growth.  It must translate from statistical compliance into tangible economic transformation. Nepal stands at a pivotal crossroads. If managed strategically, LDC graduation can serve as a launchpad toward sustainable middle-income status. If mishandled, it risks exposing unresolved structural vulnerabilities. The outcome will depend not on the label of graduation itself, but on the nation’s capacity to implement reforms, strengthen institutions, and harness this historic transition as an opportunity for durable progress.

This article has been published in online khaber – https://english.onlinekhabar.com/nepals-ldc-exit-scenario-and-strategic-pathways-for-transition.html

Bibliography

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United Nations Department of Economic and Social Affairs. (2025). Monitoring Report on Least Developed Countries and Graduation Progress. United Nations.

United Nations Conference on Trade and Development. (2023). The Least Developed Countries Report 2023. Geneva: United Nations.

International Trade Centre. (2022). Potential Export Losses from Preference Erosion for Graduating Least Developed Countries.

World Bank. (2025). World Development Indicators Database.

World Bank. (2024). Nepal Development Update.

International Monetary Fund. (2025). World Economic Outlook Database.

World Trade Organization. (2024). Outcome Document of the 13th Ministerial Conference (MC13) on Smooth Transition Measures for Graduating LDCs.

Government of Nepal. (2024). Smooth Transition Strategy (STS) 2024 for LDC Graduation.

Government of Nepal. (2024). Sixteenth Five-Year Plan.