Graduating Beyond the LDC Status: An Assessment of Nepal’s Economic Transition

In 1971, the United Nations (UN) General Assembly established an economic classification of countries, creating three groups: developed countries, developing countries, and least developed countries (LDCs). As a result of the classification, an agreement was reached whereby the international community and developed countries would provide necessary assistance to LDCs through economic policy and global aid. In order to classify countries, the UN focused on three benchmarks to guide the evaluation: Gross National Income (GNI), the Human Assets Index (HAI), and the Economic Vulnerability Index (EVI). GNI per capita refers to the total income earned by a country’s residents divided by the total population of the country. HAI measures the level of human capital, particularly in terms of indicators such as secondary school enrolment, under-nourishment, maternal mortality, adult literacy, and under-five mortality. Finally, EVI measures how vulnerable a country is to economic shocks. For a country to graduate from the LDC status, it must currently fulfil two of the three criteria in the triennial review conducted by the United Nations’ Committee for Development Policy (CDP): GNI greater than USD 1,306, HAI greater than 66, or EVI below 32.

As is often talked about, Nepal, classified as an LDC in 1971 due to a combination of low per capita income, weak human assets, and high economic vulnerability, is currently set to graduate to a developing country status in November 2026. Notably, while many countries graduate by meeting the national income criterion, Nepal is a global anomaly. It is the first and only country that is set to graduate without meeting the GNI criterion but has instead fulfilled the other two criteria with HAI reaching 77.58 and its EVI at 28.96, comfortably meeting the graduation criteria.

Nepal initially met the technical requirements for Triennial Review with a USD 659 GNI, 68.7 HAI, and 26.8 EVI. However, the devastating earthquake that same year forced a deferral of the 2018 graduation timeline to allow for reconstruction. By the 2021 triennial review, despite meeting the criteria with a USD 1027 GNI, 75 HAI, and 24.7 EVI, Nepal could not graduate due to the economic paralysis caused by the global COVID-19 pandemic. Consequently, unlike providing a standard three-year preparatory period for graduation, the CDP granted an five-year preparatory period to Nepal. However, yet again, Nepal’s graduation faced uncertainty following the September 2025 unrest. Now, considering that the March 2026 elections having successfully ended and a new government is coming into power, this article aims to provide a brief overview of the challenges and opportunities post-graduation, the preparedness for graduation, and the way forward for Nepal.

Post-Graduation Challenges and Strategic Opportunities

The transition from Least Developed Country (LDC) status represents a complex duality for Nepal. The loss of international assistance programs that have boosted Nepal’s economy is the primary challenge that arises after graduation. Specifically, Nepal will lose access to preferential market access such as , Canada’s LDC Tariff Programme, Australia’s DFQF entry for LDCs, and China’s DFQF for LDCs, which are crucial for the competitiveness of the country’s exports. Removal of these preferential tariffs results in a significant loss of exports, particularly impacting sectors like garment manufacturing, synthetic textiles, and carpet production. Additionally, Nepal will lose eligibility for specific international financial support, including new funding under the Least Developed Countries Fund (LDCF). These financial limitations and the lack of preferential market access create a challenge for Nepal to sustain steady economic growth and reduce the risk of economic reversion.

Conversely, this graduation also serves as a vital opportunity for Nepal to transition from reliance on external aid toward greater national self-reliance. By exiting the LDC category, Nepal can experience an enhanced global image and reputation, which is expected to improve

The Preparedness Gap: Strategy vs. Reality

Nepal has been preparing to graduate for almost a decade now. As part of the preparations, the This is complemented by the Nepal Trade Integration Strategy 2023, which has expanded its list of priority export products from 12 to 32, incorporating high-potential sectors like IT services, electricity, and cement to diversify the export basket and reduce dependency on traditional LDC-preferred goods. Additionally, the negotiation with the European Union about a three-year transition period post-graduation for Everything But Arms (EBA) schemes is also an advantage for Nepal. However, tlow investor confidence, declining competitiveness in exports and investment, and productivity challenges.

The Way Forward

To ensure a sustainable economic shift from LDC to a developing country, the newly elected government must address LDC graduation through structural reform and macroeconomic stability. The primary focus should be on substantially improving the “Ease of Doing Business” by reducing the bureaucratic red tape that holds back entrepreneurship and reducing Nepal’s ranking on the . The Economic Complexity Index, developed by César A. Hidalgo and Ricardo Hausmann, is a tool that is used to measure the productive knowledge and capabilities of a country. This tool is a powerful predictor of economic growth, structural transformation and resilience to shocks, which helps in identifying a country’s development. These reforms include the availability of microfinance and specialised credit to empower SMEs, which aim at promoting entrepreneurship, increasing investor confidence and leading to private sector-led economic growth and help fill the void left by the declining aid and concessional loans.

The government should, thus, prioritise regional trade agreements like the South Asian Free Trade Area (SAFTA) to strengthen economic ties and leverage Nepal’s strategic position between two of the world’s largest markets. Additionally, it should shift its focus from debt-heavy borrowing toward negotiating for official development assistance to gain high-impact technical grants that support long-term development. Bhutan’s LDC graduation is a great example to draw parallels for Nepal. Bhutan used graduation as an opportunity to strengthen export diversification, institutional capacity, and long-term development strategies through extended trade preference periods and development assistance.

There have been positive signs of the incoming government being open to positive reforms as the

Thus, although LDC graduation is a challenging task for the upcoming government due to shocks faced by the economy, it serves as a critical catalyst for structural reform. Ultimately, the government can turn graduation barriers into a foundation for long-term growth that improves the country’s reputation internationally by creating a more stable and effective business environment and addressing the problems that hinder graduation.