To Graduate or Not: Nepal’s LDC Transition Dilemma

Nepal is scheduled to graduate from the United Nations’ Least Developed Country (LDC) category in November 2026—a milestone that symbolizes progress, resilience, and decades of effort to improve human development outcomes. The graduation promises enhanced global image, better investment prospects, and integration into the global economy as a developing nation. However, as the deadline draws near, the optimism is increasingly clouded by internal instability.

The recent Gen Z protests—triggered by a social media ban and fueled by deepened frustrations over corruption, unemployment, and poor governance—have exposed the country’s fragility. The unrest engulfed streets in fire, wrecked infrastructure, forced businesses to close, and upended the political order. The timing could not be more precarious. While the ultimate decision rests with the United Nations, some experts argue that Kathmandu should formally seek a deferral, much like Bangladesh, which requested an independent assessment to ensure its readiness for graduation.

Nepal first met two of the three criteria for graduation from the UN’s Least Developed Country (LDC) category in 2018, falling short only on the income threshold. Following the devastating 2015 earthquakes, Nepal deferred its graduation to avoid the risk of reversal. In 2021, the UN Committee for Development Policy (CDP) reaffirmed that Nepal still lagged behind on the income benchmark but nonetheless recommended graduation to the UN Economic and Social Council (ECOSOC), granting a five-year transition period to account for the impacts of COVID-19.

As November 2026 approaches, Nepal faces a delicate balancing act: achieving a historic milestone while managing domestic instability that could undermine the benefits of graduation.

Political Unrest Challenges Readiness

The recent protests have exposed vulnerabilities in governance, security, and the economy, casting doubts on Nepal’s preparedness to exit the LDC category. Triggered by a social media ban and intensified by widespread frustration over corruption and economic stagnation, the protests resulted in casualties, business disruptions, and political upheaval. This eroded investor confidence and slowed economic activity; just as the country approaches a critical juncture.

Graduation for LDC status entails losing preferential trade terms, concessional financing, and technical support. The recent unrest caused significant economic damage, with private sector losses reportedly amounting to tens of billions of rupees. The World Bank has warned of the possible negative growth, noting that Nepal’s macroeconomic resilience is weaker than previously assumed. Graduating amid slowing growth and disrupted tourism risks triggering painful adjustment shocks for businesses and households.

Politically, the protests have revealed the government’s limited capacity to manage crises. Weak institutions and eroding public trust undermine governance and human development metrics used by the UN to assess graduation readiness. Premature graduation could strip away crucial policy space and concessional support before essential reforms—such as improving trade facilitation, expanding social protection, and overhauling regulations—are fully implemented.

A well-justified request for deferral could provide Nepal with time to stabilize institutions, restore investor confidence, rebuild private-sector capacity, and strengthen social safety nets. While a deferral may carry reputational risks, the alternative—graduating amid instability—could impose far greater economic and social costs.

“Nepal is facing deep political and economic uncertainty following the recent Z protests. The economic losses have been severe, both in financial terms and in physical infrastructure,” Dr Paras Kharel, Executive Director of SAWTEE, said. “Government estimates suggest losses of over Rs 100 billion in the public sector and more than Rs 80 billion in the private sector. Physical infrastructure forms the backbone of a country’s productive capacity. With significant parts damaged, the economy’s ability to produce and sustain growth has been severely undermined. Reconstruction may lead to a temporary rebound, but a loss is still a loss.”

Tourism, a critical source of employment and foreign exchange, has been particularly hard hit.

The World Bank projects a three-percentage-point decline in GDP growth due to disruptions in the sector. Investment sentiment, both domestic and foreign, has weakened amid heightened uncertainty. Nepal’s smooth transition from LDC appears increasingly challenging under these volatile conditions.

Kharel says that the government’s immediate priorities—elections and political stability—may limit its capacity to implement post-graduation reforms and protect vulnerable sectors. Experts broadly agree that Nepal’s current vulnerabilities justify seeking a review of its graduation timeline, following the UN’s provision for reconsideration in cases of external shocks or major crises. 

As in Bangladesh, pursuing a reassessment should not be seen as reluctance to graduate but rather a strategic step to ensure that graduation delivers sustainable, long-term benefits. Postponing the milestone would recognize the need for a stable foundation before moving forward.

Lost Benefits and Trade Vulnerabilities

Nepal has signed multiple regional, bilateral, and multilateral trade agreements to expand market access, but decades of preparation have not yet delivered the expected gains.

Although the Nepal Trade Integration Strategy (NTIS) stresses deeper engagement in trade agreements and stronger diplomacy, progress remains limited.

Nepal’s trade remains heavily concentrated with India, which accounts for over two-thirds of total trade. Preferential duty-free access under bilateral treaties will largely remain unaffected by LDC graduation. However, Nepal risks losing significant benefits in other markets where LDC status confers preferential treatment.

In the European Union (EU), Nepal currently enjoys Everything But Arms (EBA) preferences under the Generalized System of Preferences (GSP), granting duty-free access for nearly all products. Between 2015 and 2020, exports to the EU averaged $60.9 million, with over 80% benefiting from EBA. The EU has agreed to extend this facility for recently graduated LDCs until 2029, but failure to qualify for GSP+ thereafter could reduce exports by nearly 19%.

GSP+ access requires Nepal to ratify and enforce 27 international conventions covering human rights, labor standards, environmental protection, and governance. Progress on these fronts has been slow, and institutional capacity remains weak. 

In Türkiye and the UK—both important markets for Nepal—exports currently receive limited LDC-related concessions. Post-graduation, Nepal would need to secure equivalent access under new schemes, necessitating compliance with international conventions and regulatory standards.

The United States, Nepal’s second-largest export market, offers limited duty-free access, excluding key products like garments and footwear. After graduation, Nepal will retain only standard developing country preferences which will affect roughly 3% of its exports.

China provides zero-tariff access on most LDC goods, but utilization is low. Without a new trade arrangement, exports could face standard Most Favored Nation (MFN) tariffs.

Despite decades of preparation, Nepal’s progress in graduation has been slow, said Rabi Shankar Sainju, former joint secretary at the Ministry of Industry, Commerce and Supplies. "We can enjoy LDC benefits for three years after graduation, but the reality on the ground presents serious challenges,” he said.

Under SAFTA, Nepal benefits from LDC-specific provisions, but trade with South Asian neighbors—excluding India—remains minimal. Graduation also reduces access to LDC-specific WTO flexibilities, affecting subsidies, export incentives, and TRIPS-related benefits. Although the Nepal Trade Integration Strategy (NTIS) has highlighted proactive strategies to minimize post-graduation shocks, the implementation has been limited. With November 2026 approaching, urgent attention is needed on trade policy reform, stronger diplomacy, and negotiations to protect market access and competitiveness.

“Graduation should signal resilience and an improved investment climate,” Sainju said. “But our infrastructure is inadequate, the private sector is demoralized, and investor confidence is low. A deferral may be necessary, yet there is little hope that meaningful improvements will happen, even with an extension.”

Opportunities Beyond LDC Status

Despite these challenges, LDC graduation presents significant opportunities. It reflects decades of progress in poverty reduction, education, healthcare, and institutional capacity. More importantly, it allows Nepal to redefine itself internationally—not as aid-dependent, but as an emerging economy ready to compete and collaborate globally.

“Graduation enhances Nepal’s international image and signals increasing stability and potential. This can attract higher foreign direct investment (FDI), as investors often associate LDC graduation with better governance and market readiness,” said Sainju.

For Nepal, this could translate into new investments in hydropower, tourism, agriculture, and information technology—key sectors for job creation and export diversification. A strong international reputation can also encourage diaspora investment thereby strengthening domestic economic capacity.

Graduation also prompts domestic transformation. Reduced dependence on concessional aid encourages stronger revenue systems, improved governance, and institutional reform. Policy innovation can focus on sustainable industries, green energy, and digital transformation. Nepal’s large youth population, energized by recent activism, can be mobilized for entrepreneurship and technological progress, which, in turn, will enhance self-reliance.

“While economic growth may slow, human development indicators remain strong. In principle, the government is prepared for graduation,” Dr Shiva Raj Adhikari, former Vice-chairperson of the National Planning Commission (NPC) said.

While countries like Bangladesh and Laos have requested deferrals for specific reasons, Nepal, which is ready in principle, is facing shifting priorities and political distractions that could complicate smooth graduation.

Nevertheless, the long-term benefits of stepping into developing country status outweigh short-term setbacks.

Rebuilding Amid Recession Risks

Nepal is entering this historic transition amid an exceptionally turbulent period. The World Bank has projected a GDP growth of 2.1% for 2025/26, down from 5.2%, while the IMF has forecast a 4% growth with but warning of downside risks. Prolonged instability could even push the economy into contraction, with growth potentially falling to –1.5%.

Gen Z protests inflicted severe economic and infrastructural damage, destroying property, disrupting commerce, and undermining investor confidence. Thousands of jobs—particularly in tourism and hospitality—disappeared, while insurance claims have exceeded Rs 23 billion.

Long-standing structural weaknesses compound these shocks. Heavy dependence on remittances, weak domestic job creation, stagnant industrial output, and low productivity has been hindering efforts for economic diversification. Youth unemployment stands at 22.7%, while frequent natural disasters have affected agriculture and infrastructure. Delayed governance and fiscal reforms has been impeding long-term recovery.

Investor sentiment remains bleak; the private sector is demoralized, ongoing investments are stalled, and the business environment remains fragile. Tourism has been severely affected, and uncertainty over law and order is deterring both local and foreign investors.

“With elections scheduled, the government’s priorities have shifted. Job losses and destruction of infrastructure have only added to the burden,” said economist Sainju.

Immediate reconstruction and reforms to restore confidence are critical. Without timely and bold action, the Gen Z protests risk being remembered not as a catalyst for positive change but as a turning point that delayed Nepal’s development.

(This report was published in November 2025 issue of New Business Age Magazine.)