Should Bangladesh defer LDC graduation?

As Bangladesh approaches its scheduled graduation from the United Nations' Least Developed Country (LDC) category in November 2026, concerns are mounting among industrialists and exporters about the potential impact on their businesses. With the impending loss of trade benefits typically enjoyed by LDC countries, there is a growing call from business leaders for a deferment of this graduation. 

Recently, the president of the Bangladesh Chamber of Industries (BCI) Anwar-ul Alam Chowdhury also voiced concerns about the potential consequences of LDC graduation. He warned that Bangladesh's economy could face severe consequences if the LDC graduation proceeds as scheduled. Highlighting the country's ongoing economic challenges, including a depressed business climate, he noted that approximately 100 garment factories have already been closed in the past year, and another 200 are on the verge of closure. He concluded that amidst this challenging environment, "LDC graduation would be suicidal for Bangladesh."

There is no denying that the economy is in the throes of a multitude of crises, including persistent high inflation, foreign exchange imbalance, dollar shortage, dwindling foreign reserves, decline in investment, widening fiscal deficit, and a surge in non-performing loans in the banking sector. Initially, the economy started facing headwinds due to a confluence of external shocks - COVID-19 pandemic and Russia-Ukraine war. Then, internal political instability, widespread corruption, and an estimated $16 billion in annual money laundering during Sheikh Hasina's autocratic rule have exacerbated the country's economic woes. And then, following the August 5 changeover, a prolonged political chaos and uncertainty, coupled with gas crisis have led to widespread factory closures and labour unrest. This has made many weary of the country's economic future and prompted calls for the deferment of the graduation.

While graduation from the LDC category marks a significant milestone in Bangladesh's development trajectory, it will present new economic realities and challenges. As an LDC, Bangladesh has historically enjoyed a range of significant benefits, including duty-free and quota-free market access to major markets, which has particularly helped the garment sector to thrive, access preferential treatment and extended implementation periods under World Trade Organization (WTO) agreements, eligibility for significant financial and technical assistance from donor countries and international organizations under the Official Development Assistance (ODA), and lowered budgetary contributions to international organisations such as the United Nations.

These benefits have played a crucial role in Bangladesh's economic development. However, upon graduation from LDC status, Bangladesh will lose access to these preferential treatments. For example, according to a recent government strategy paper, 75 per cent of Bangladesh's exports enjoy duty-free access to international markets due to its LDC status. Once Bangladesh graduates to a developing country, it will no longer be eligible for this preferential treatment. Instead, an average tariff of 20 per cent could be imposed on exports, depending on the importing country. This raises concerns about the future of the country's export-oriented industries. Will exporters be able to maintain their competitiveness without these privileges? Can the economy withstand a potential decline in exports as a result of loss of preferential trade benefits in export?

Given these impending challenges, many are of the view that the government must carefully consider the implications of the graduation and determine the timeframe for a smooth transition based on economic realities. But the question is, will it be feasible for Bangladesh to request a deferment?

Precedents for deferment exist. For instance, Nepal, which first met the graduation criteria in 2015, requested to defer its graduation following a devastating earthquake in 2017. Now, Nepal will graduate from LDC in 2026.

However, any request for deferment would require strong justification and would undergo rigorous scrutiny by the United Nations Committee for Development Policy (CDP). The CDP will closely monitor Bangladesh's progress and assess the country's readiness for a smooth transition.

It is important to note that Bangladesh has already met the graduation criteria on two previous occasions (2018 and 2021). The CDP's latest triennial review (February 2024) reaffirmed that Bangladesh has comfortably met the criteria for LDC graduation. According to the latest assessment, Bangladesh's Gross National Income (GNI) per capita stands at $2,684, significantly above the graduation threshold. The Human Assets Index (HAI) of 77.50 also surpasses the graduation requirement and the LDC average. Additionally, Bangladesh's Economic and Environmental Vulnerability Index (EVI) of 27 in 2024 meets the graduation criteria of 32 or below. Even considering the recent subdued economic performance, it is unlikely that Bangladesh will fall below the required thresholds for LDC graduation.

Moreover, a deferment would position Bangladesh as an outlier among its South Asian neighbours. Bhutan graduated in 2023, and Nepal is set to graduate in 2026, leaving only war-torn Afghanistan to stay in the LDC category after 2026. Would Bangladesh find it comfortable to remain in such a position?

Considering this, some observers opine that the best option for Bangladesh will be to focus on necessary reforms and capacity building for a smooth and sustainable graduation, rather than getting distracted by calls for deferment.  The panel of experts that prepared the white paper on Bangladesh's economy has also recommended proceeding with the scheduled graduation. It advised the government to formulate a robust transition plan to mitigate potential adverse impacts and facilitate structural transformation.

Experts suggest that to tackle post-LDC challenges, Bangladesh must diversify its economy and export basket, reduce reliance on preferential trade agreements, and develop competitive advantages in skills, productivity, and innovation. By enhancing trade competitiveness, improving export quality, negotiating bilateral and regional trade agreements, and complying with WTO regulations, intellectual property rights, and labour standards, Bangladesh can avail itself of preferential access to many markets.  Equally important will be compliance with evolving global trade trends, which increasingly emphasise sustainability, environmental responsibility, and social equity. By addressing these challenges and implementing a comprehensive strategy, Bangladesh will be better equipped to navigate the post-LDC challenges and position itself as a more competitive and competent player in the global market.

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