In today’s globalized world, trade and investment play an indispensable role in a nation’s development. As is common knowledge, and as research has found, there is a strong correlation between trade, foreign investment, and a country’s economic growth. Nepal stands at a crucial juncture, where strategic policy decisions can redefine its economic future. As Nepal navigates its future, three major developments will reshape its socio-economic landscape in the coming years. The first and most apparent is the graduation from a Least Developed Country (LDC) in 2026 to become a developing country according to the United Nations standards. This transition from LDC to a developing country has to be seamless. Then, the regulatory changes for enhancing trade and foreign investment climate require continuation. Progressive steps need to be taken to integrate Nepal into the world economy. Lastly, as international aid declines, following trends seen in other developing nations, Nepal must pivot toward self-sufficiency through expanded trade and investment.
Smooth LDC Graduation
With Nepal’s LDC graduation expected in November of next year, trade and investment will be key aspects of the transition. Nepal had been classified as a Least Developed Country (LDC) since 1971 by the United Nations (UN). Finally, the UN’s 2021 triennial review recommended its graduation by November 24, 2026, after previous delays due to economic vulnerabilities, including the 2015 earthquake and low per capita income. The Committee for Development Policy (CDP) assesses LDC status based on three criteria: GNI per capita, the Human Assets Index (HAI), and the Economic and Environmental Vulnerability Index (EVI). For graduation, a country must meet at least two criteria in two consecutive reviews or have a Gross National Income (GNI) per capita double the threshold. In the 2021 triannual review, Nepal scored an HAI of 74.9 and, an EVI of 24.7 however; it did not meet the income criterion with a GNI per capita of 1027. After more than half a century of remaining in an underdeveloped status, the country is now finally moving to a developing phase. This is primarily a national milestone in terms of boosting the country’s morale. Concurrently, it brings additional responsibilities for the nation to develop confidence in its developmental trajectory. Moreover, Nepal’s progress toward LDC graduation appears irreversible, with rising per capita income, partly fueled by remittances, driving imports and domestic consumption. Nepal’s next step is to eventually reduce reliance on LDC-specific preferential tariffs and arrangements, which are susceptible to external shocks. The country also has to work on negotiating trade arrangements with major trading partners and find alternatives to development assistance such as foreign direct investment (FDI), private equity, and impact investments.
Continuous Reform and Opening Up
Ahead of the Nepal Investment Summit in April 2024, the government amended nine laws through an ordinance to attract investors, focusing on streamlining land acquisition, easing environmental regulations, supporting startups, and enhancing Special Economic Zones (SEZs). Following that, in January 2025, three key ordinances were introduced, amending the Foreign Investment and Technology Transfer Act to allow Nepali IT firms to invest abroad, simplifying company registration, and improving service delivery by reducing bureaucratic delays. Additionally, 29 laws were revised to relax land-holding regulations, support service industries in SEZs, provide 10-year visas for Non-Resident Nepalis (NRN), and simplify legal processes. These reforms aim to create a more investor-friendly environment by addressing legal and procedural barriers. Moreover, as per the World Bank’s Business Ready Report 2024, Nepal scored high in the operations efficiency pillar among lower-middle-income countries. For Nepal, these measures of continued reforms and globalization are extremely important to drive economic change. However, besides the proper execution of the current reforms, continued reforms are needed in areas like profit repatriation, transparent taxation laws, trademark protection, and exit policies.
Transitioning from Aid to Trade and Investment
The recent USAID aid cuts hampered 300 non-governmental organizations (NGOs) and consultancies in Nepal, resulting in direct job loss for more than 1500 individuals. This incident is a rather stern reminder for aid-dependent countries like Nepal to move from aid to sustainable sources of economic activity derived from the private sector. In this regard, the development sector needs to be transformed into a partnership model for a win-win situation. Moreover, the Government of Nepal has laid out ambitious plans to graduate to a high-income country by 2043. In order to achieve this, the sixteenth five-year plan, from 2024/25 AD to 2029/30 AD echoes the fifteenth five-year plan, where Nepal aims to push its per capita income to USD 12,100 from the current USD 1377. For fulfilling this goal, Nepal can no longer limit its Foreign Direct Investment (FDI) to the million figure with the FDI-to-GDP ratio below 1%. In the long term, the FDI figure needs to match the remittance inflow and potentially replace it. This will happen when multinational companies go beyond selling in Nepal and establish offices, retail outlets, and manufacturing facilities.
Lessons from Global Best Practices
Countries that have enhanced trade and investment facilitation have implemented various strategic reforms to attract foreign direct investment (FDI) and stimulate economic growth. Vietnam’s Đổi Mới reforms, initiated in 1986, transitioned the country from a centrally planned economy to a socialist-oriented market economy, leading to significant economic transformation. Singapore’s Economic Development Board (EDB) operates with a private-sector business mindset, actively attracting multinational corporations with a seamless business environment. Similarly, Rwanda Development Board (RDB) serves as a one-stop center to streamline business registration and investment processes, significantly improving its business environment. Meanwhile Nepal’s neighbor and current LDC, Bangladesh, leveraged its competitive labor market and implemented trade-friendly policies, resulting in the growth of its garment industry into a global leader in apparel exports. Thus, Nepal must learn from these examples to reduce bureaucratic obstacles and foster investor-friendly policies.
Way Forward
Moving forward, a smooth LDC graduation, continued regulatory reforms, and a gradual shift away from reliance on aid will shape Nepal’s economic trajectory. In this regard, the country’s strategic location in between the world’s fastest-growing economies should be an opportunity rather than a barrier for the nation. Thus, as in the past, the adaptive nature of Nepalis should come into play as Nepal navigates crucial junctions of its economy in the coming decades.
Sagar Jung Karki works as beed at beed management, having previously interned at the Institute for Integrated Development Studies (IIDS). His core areas of interest include international business, trade, entrepreneurship, and digitalization. He holds an MSc in International Business from the University of the West of England. As a global-minded individual, Sagar aspires to become a pracademic, contributing positively to the world.
