Collective action to tackle climate change

This was published in SAWTEE’s eNewsletter Trade, Climate Change and Development Monitor, Volume 18, Issue 10, October 2021.

Nepal’s Quest for Smooth LDC Graduation

As Nepal is slated to be graduated from the Least Developed Country (LDC) category, it is worth noting that Nepal is the first country ever to graduate without fulfilling the per capita income criterion. As per the UN committee for Development Policy (CDP), graduation requires to fulfil two of these three criteria --per capita income, Human Asset Index (HAI) and Economic Vulnerability Index (EVI). Nepal’s annual preliminary estimate of per capita income in 2021 was only US$1196 while the graduation requirement is US$ 1230. Since, per capita income is widely regarded as the most important determinant of the three, Nepal’s failure to meet this requirement has cast doubts if the graduation will be sustainable and irreversible.

Ambitious targets

The current level of per capita income notwithstanding, the National Planning Commission (NPC) envisioned plan for Nepal is to achieve a per capita income of US$ 1595 by 2024. While setting an ambitious target is a welcome move, it is also necessary to evaluate if such target can be achieved in the coming years given the current economic situation. To put this ambitious target into perspective, one can look into the per capita gross national income (GNI) growth trends over the last decade. In the decade between 2010 and 2020, Nepal recorded the highest per capita GNI growth at 8.07 percent on FY2018-19 and the lowest was at -0.73 percent on FY2015-16. Much of this high growth credit goes to the reconstruction activities undertaken in the post-Gorkha Earthquake period.

Considering the economic downturn that two waves of the pandemic has brought upon in the successive fiscal years, it seems difficult for Nepal to quickly recover. During the decade long period between 2010-2020, the per capita income saw an average growth rate of 3.67 percent. Now, assuming that Nepal grows at the same growth rate till 2024 which should be doable, it’s possible for Nepal to achieve the target of US$ 1230 by FY2022. But achieving the target of US$ 1595 is an impossible dream at 3.67 percent growth rate. Moreover, even at a constant growth rate of 8.07 percent, it’s still not possible for Nepal to increase the per capita income to US$ 1595. 

However, to meet such ambitious target, Nepal government needs to draw a sustainable and effective resources mobilization and efficient investment strategy. The 25-year long-term economic vision plan, prepared by the NPC which is a guiding document for Nepal’s major economic policy targets, draws out the targets and development strategies in three facets as generating, achieving, and sustaining prosperity and happiness. However, given the poor history of Nepal government’s rate of achieving the stated targets on time, it is doubtful that the development plans outlined are formulated and implemented effectively. Stating and planning the strategy is one thing but implementing them in reality have been a whole different ball game. 

Possible Implications 

Post-graduation, Nepal, as a developing country, will lose out on many preferential treatments that an LDC gets. Nepal is expected to lose duty-free-quota-free market access to many export destination countries and there is also a risk of losing a significant overseas development assistance (ODA). 

While multiple preferential treatments may be gone, the ‘losing out’ scenario is insignificant than it is feared. For example, Nepal’s two largest export markets are India and the European Union (EU). The graduation status will have little impact on Nepal’s trade to India since the trading between the two neighbours are largely governed by bilateral treaty.  However, the EU market is likely to get affected given that the trade preferences offered under the everything-but-arms (EBA) scheme to the LDCs will no longer be available to Nepal.

Likewise, the contribution of ODA via different channels, particularly for the infrastructural development funding has been crucial for Nepal. The importance of ODA is reflected in their role in post- earthquake reconstruction activities too. Hence, it is pertinent to understand if ODA would decrease after the LDC graduation. On the very note, Developed countries are committed to make an equivalent of 0.15-0.20 percent of GNI contribution to LDC’s and the commitment to developing nation is 0.7 percent of GNI. While the graduation will definitely have some effects, it is pertinent to understand that the effect would be very negligible. It is so because the commitment hasn’t been met yet, given that only five countries have met the target level and there is no assurance that it would be meet after Nepal’s graduation. 

Also, generally, many countries have a history of providing grants and loans depending on the country’s contemporary situation rather than the countries graduation status. For example, during the earthquake period in Nepal, Nepal have had a massive increase in loans and grants inflow. Moreover, if we look into the highest ODA recipient countries from 2013-2017, only four countries from developing nations rank in the top 10 and Nepal ranks at 30. 

A Way Forward

Keeping the graduation in focus, the transition period needs to be taken as an opportunity to bounce back from the COVID-19 pandemic and work on boosting economic growth. Hence, the next five years are immensely crucial for Nepal. To achieve those policies, Nepal should orient towards the objective of sharpening productive capacity, increasing foreign direct investments (FDI), and expanding trade base. 

Attracting FDI can stimulate investment and expand exports as experience of many so-called Asian giants like China, Vietnam, Malaysia among others have highlighted. FDI increase, in the time of transitionary period, will also boost productivity, upgrade industrial skill, aid technology transfer, and have a positive spillover effect. However, Nepal’s FDI performance till date has been weak compared to other developing countries with which Nepal will have to compete. To increase investment, policies are required to encourage efficient business opportunities via easy and smooth paperwork to install a positive business climate.

Additionally, Nepal can explore more trade opportunities, especially in the region and neighbourhood. Moreover, current low level of trade preference utilisation rate also suggest that Nepal’s export challenges are more on supply-side constraints than the lack of market access. Thus, transition strategy should focus on enhancing domestic capacity so that it not only enhances export performance but creates a strong productive base within the country. The issues of market access could be achieved by negotiating bilateral and regional arrangements with the destination countries. 

Increasing domestic productive capacity, in many ways, also broadens the employment opportunity within the nation and helps boost economic growth. However, to have a strong productive base, Nepal needs to make use of its resources in the best possible manner. Generally, LDC’s have lower resources capacity and limited capabilities to expand their productive base. However, Nepal does not have as many problems given the abundant resources present in Nepal in terms water recourses to tourism capacity. Nepal, as a nation, needs to capitalize on the very asset.