Tourism, agribusiness and hydropower are areas where Nepal has a natural comparative advantage and much unexploited potential in generating growth and creating employment opportunities
Nepal is a South Asian least developed country that has made significant socio-economic progress in recent times despite being confronted by unfavourable conditions, adversely affecting its development prospects. Being a landlocked country means trade-led growth is not an easy option, and its mountainous terrain poses a natural barrier for internal integration. Furthermore, susceptibility to natural disasters, such as earthquakes, has frequently caused Nepal to suffer from severe economic and human losses.
Political instability arising from a prolonged transition – from a monarchy to multiparty democracy – associated with armed conflict and changes in government in quick succession has also taken its toll on the economy. Yet, Nepal has demonstrated a paradoxical development pattern in which a relatively low long-term average economic growth has been accompanied by brisk poverty reduction.
Nepal also met most of the Millennium Development Goal (MDG) targets, demonstrating a more inclusive development paradigm in comparison with many countries at a similar level of development. Indeed, it met two of the three criteria for graduation from the group of least developed countries (LDCs) for the second consecutive time in the latest triennial review, held in 2018, by the United Nations Committee for Development Policy (CDP).
However, the Committee deferred its decision to recommend the graduation of Nepal until the 2021 triennial review because of the concerns about the sustainability of development progress.
Graduation from LDC status requires a country to meet development thresholds under at least two of the three predefined criteria (of per capita income, human asset and economic vulnerability) in two consecutive triennial reviews.
Nepal first met the human asset and economic vulnerability criteria in 2015 triennial review.
It is to be noted that there is also a provision for the 'income-only' graduation rule under which, if the 3-year average per-capita gross national income of an LDC has risen to a level at least double the graduation threshold, the country could be eligible for graduation regardless of its situation under the other two criteria. Once a country fulfills the graduation criteria in two consecutive triennial reviews, it is recommended to graduate from the group in three years' time.
Landlocked countries are mostly dependent on trading with their adjacent countries. As such, India is the single largest export destination of Nepal, accounting for 58 per cent of its total exports. This is followed by the United States of America (11%), Turkey (4%), Germany (4%), United Kingdom (3%), China (2%) and Singapore (2%).
It is rather striking that despite sharing a common border and being one of the major global economic powerhouses, China's significance in Nepal's exports is so low.
A high export market concentration poses a serious risk due to any unfavourable developments in the main market(s). Nepal's export market concentration is estimated to be higher than Afghanistan and Lao People's Democratic Republic, two landlocked LDCs in Asia. On the other hand, Nepal's export market penetration rate is just 2.4 percent, which is lower than that of Asian LDCs of Afghanistan, Bangladesh, Maldives and Myanmar.
Nepal was included in the Least Developed Country (LDC) list in 1971. Over the past decades, it has managed to make remarkable progress under two of the three criteria used in assessing graduation qualification.
These are the Human Asset Index (HAI) and the Economic Vulnerability Index (EVI). Based on the improvements in these two areas, Nepal became eligible for graduation in the2015 triennial review by the United Nations Committee on Development Policy (CDP).
Nepal could also maintain its eligibility in the 2018 review in the same way. However, the CDP deferred its decision to recommend the graduation of Nepal until the next review because of the concerns about the sustainability of development progress.
It is rather quite extraordinary that with a per capita income of $745 in 2018, as low as just 60 per cent of the graduation threshold level of per capita income of 1,230, Nepal could meet the other two criteria.
Nepal is the only country amongst all the graduated countries as well as countries with graduation eligibility (which are likely to graduate by 2021), secured graduation requirements without fulfilling the per capita GNI threshold criterion.
For countries' graduation from LDC status, their small business ability to trade is key to a smooth transition. In the case of Nepal, 22 per cent of its exports will face higher tariffs, leading to a potential 4 per cent decrease in 2026 exports.
In this regard, the most affected sectors will be the "textile and clothing sectors", especially "apparels" ($ 21 million); "synthetic textile fabrics" $ 14 million) and "carpets" ($ 6 millions).
These losses will mostly be in exports to the European Union (EU), Turkey and China.
Finally, it must be pointed out that like other graduating LDCs, Nepal will continue to confront development challenges. Therefore, it is important to attach policy priority to sectors that can build growth momentum and sustain it.
Tourism, agribusiness and hydropower are areas where Nepal has a natural comparative advantage and much-unexploited potential in generating growth and creating employment opportunities.
Key impediments to unleashing dynamism in these sectors – such as lack of investment, large infrastructure deficit and weak implementation of development projects – must be tackled effectively for smooth graduation and Nepal's transition to a middle income country and beyond.
Like other graduating LDCs, Nepal will continue to confront development challenges. Therefore, it is important to attach policy priority to sectors that can build growth momentum and sustain it.
A version of this article appears in the print on January 5, 2022, of The Himalayan Times.