November 16: A study conducted by South Asia Watch on Trade, Economics and Commerce (SAWTEE) suggests that Nepal’s graduation from LDC status in 2026 will have trade implications in terms of higher tariffs and more stringent rules of origin in preference-granting countries.
According to the findings of the study shared by SAWTEE, the projected loss in total exports emanating from the increase in tariffs will be moderate. However, the loss emanating from more stringent rules of origin, while uncertain, could be significant, especially in the garments sector, according to the study report.
Issuing a statement on Wednesday, SAWTEE said that Nepal’s graduation could result in a loss of policy space, either through the loss of current flexibilities and special treatment, such as in the area of intellectual property rights, or through greater scrutiny of certain practices, such as the subsidy regime. “The policy space to promote infant industries and exports, and pursue public health objectives, could be squeezed.”
According to the study, the impact on development cooperation will be modest as most of the development partners—multilateral and bilateral—have indicated that LDC status is not the main criteria for aid flows. However, some development partners may switch from grants to concessional loans or increase interest rates for concessional loans, added the report.
“Furthermore, Nepal could lose access to specific instruments and funds dedicated exclusively to LDCs, particularly with regard to climate change-related funds, after a transition period.”
The study report has recommended Nepal to aspire to become a party to the more generous preferential schemes such as the EU’s Generalized System of Preferences Plus (GSP+) and the UK’s GSP Enhanced Framework, while studying the implications of acceding to the additional conventions that Nepal needs to ratify to qualify for these schemes.
“Nepal should also initiate dialogue with other trading partners seeking an extension to LDC-specific concessions and preferences for another 3-5 years following graduation,” the report further states.
Other recommendations include lobbying for lenient rules of origin (ROOs) for LDCs for a period sufficient for the private sector to adjust to the new ROOs.
“To realize the untapped export potential of Nepal, the government should prepare trade strategies in consultation with the private sector to strengthen the overall competitiveness of the economy, upgrade exporter’s capabilities, diversify export products and markets, simplify and streamline processes to attract more foreign direct investment and encourage enterprises to participate in regional/global value chains.”
According to the study report, the government should explore new forms of finance, including blended finance, public-private partnerships, private philanthropies and co-financing, among others, and work with development partners for new forms of support mechanisms such as dedicated funds for graduated countries, disaster insurance, and technology transfer mechanisms.
