Managing Bangladesh’s LDC Graduation: Daunting or Doable?

The UN General Assembly (UNGA), during its 76th session, adopted a resolution on Bangladesh's graduation from the Least Developed Countries (LDCs) category, scheduled to be effective in 2026. This is, no doubt, a watershed moment for Bangladesh, the largest LDC in terms of economy size, especially as this historic achievement coincides with the golden jubilee of the country's independence. Critics say, citing post-graduation challenges, that "the graduation might be a punishment instead of reward, if Bangladesh fails to devise smooth transition strategies for confronting the challenges posed by this transition."

What awaits a developing Bangladesh

The transition from LDCs does come with a cocktail of challenges and opportunities. The most common economic challenges that every LDC graduate faces is the loss of LDC-specific international support measures (ISMs), such as preferential market access. The decline of existing privileges and preferences—a normal outcome of this graduation—will adversely hit the exports of Bangladesh, especially that of apparel products, to European and North-American markets. It is estimated that Bangladesh may experience a shortfall of 8-10 percent of its gross export revenue, amounting to almost USD 2.5 billion annually, due to the loss of duty-free and quota-free market access. Besides, the duty-free trading facilities that Bangladesh is currently enjoying under the World Trade Organization's (WTO) generalised system of preferences (GSP) will be curtailed once it leaves the LDC group. With graduation, Bangladesh will no longer be eligible for LDC-specific special and differential treatment, aimed to facilitate LDCs to increase participation in international trade, under WTO agreement.

Bangladesh, a USD 3 billion market for pharmaceutical products, is the only LDC that can meet almost 98 percent of its national demand for pharmaceutical goods. It exports pharmaceutical products to nearly 150 countries; it earned USD 169 million in 2020-2021. The Trade-Related Intellectual Property Rights (TRIPS) waiver for pharmaceuticals contributed greatly to the advancement of the country's pharmaceutical industry. The exemption in patent licensing for public health-related goods will be shrunk after graduation, which may slow down this industry's growth. Also, Bangladesh will have to comply with the WTO agricultural requirements post-graduation, which will not allow the continuation of subsidies currently being provided to the agriculture sector.

After this economic transition, Bangladesh will not be considered for grants and soft loans under official development assistance (ODA) that it has been receiving since 1971. Also, the developed countries' commitment to provide 0.15-0.20 percent of their GNI in the form of ODA to LDCs cannot be availed by Bangladesh after becoming a developing country. Moreover, the cessation of access to LDC-exclusive concessional finances may temporarily halt the country's development stride.

The Green Climate Fund (GCF) is a global financing scheme with special consideration for assisting climate-sensitive adaptation and mitigation measures of LDCs. Being one of the most climate-vulnerable countries, Bangladesh's graduation journey will be much more challenging because of the forfeiture of specialised finance opportunities—which includes the GCF—required to counter the climate crisis. Besides, The UN Technology Bank, launched to enhance the contribution of science and technology for the sustainable development of LDCs, will also stop assisting Bangladesh once it moves to the bracket of developing nations.

LDC countries have access to the Investment Support Programme—e.g. on-demand legal assistance—for investment-related negotiation and dispute settlement. And the Enhanced Integrated Framework supports LDCs to use international trade as an engine for economic growth and sustainable development. It is also noteworthy that developed countries offer scholarships and fellowships to the citizens of LDCs for capacity-building. All of these exclusive facilities will come to an end as Bangladesh becomes a developing country. The country will also not be entitled to the caps and discounts on subscriptions available for LDCs, which will result in higher contributions to different international organisations, like the UN.

But there are benefits too

Having said all that, graduation from the LDC group essentially means acquiring a seal of global approval for development achievements, which will brighten Bangladesh's image in the world court. This will increase FDI inflow by transmitting positive signals to the foreign investors regarding the country's congenial business environment. The growing FDI and inevitable structural and policy reforms will result in a higher tax-GDP ratio after graduation.

Post graduation, Bangladesh may be entitled to GSP+, a special incentive arrangement for good governance and sustainable development, which slashes tariffs on goods being imported to the EU from low and lower-middle-income countries. The graduation will boost the country's confidence in dealing with international financial actors and enhance its brand value, making the economy more attractive to global lenders. Also, it will upgrade "sovereign credit rating," an indicator of creditworthiness, once the country moves out of the list of risky countries: the LDCs. This implies a reduced cost of international finance due to improved perception about country-level market risks.

The preparation strategies

After graduation, Bangladesh may be infected with "Dutch Disease," since the country relies heavily on the RMG sector, which has been bringing in more than 80 percent of the country's export earnings for the last several years. To avoid this consequence, the country should diversify its export basket by promoting the export of new products—e.g. plastic items, leather goods, frozen foods, etc. Besides, the government should analyse the markets in different regions, such as Latin America, the Middle East, etc and formulate strategies for penetrating those markets as part of diversifying export destinations.

An article published in The Diplomat last month explained why Bangladesh should join different regional trade blocs, such as the RCEP, to enhance economic performance amid the pandemic gloom. In addition, connecting with different regional trade blocs and signing FTA with individual countries, even at the expense of opening up the domestic market for getting reciprocal access, will also help the country to redress the probable negative impact of graduation on the balance of trade. This will result in intense competition from foreign competitors, for which Bangladesh should focus on product quality improvement.

Along with ensuring rapid implementation of the One-Stop Service of Bangladesh Investment Development Authority (BIDA), the country may also follow the footprints of Vietnam to boost FDI inflow after graduation. It should also focus on improving its position in the Ease of Doing Business ranking. And Bangladesh may also negotiate with WTO for not imposing all the conditions of developing countries at once, considering the economic fallout triggered by Covid-19.

Graduating to the developing countries group is the fruit of Bangladesh's judicious macroeconomic management policy and planned investment for infrastructural and human resource development. It is one of the very few countries that have effectively utilised the LDC-specific preferential treatments, while expanding footsteps in international trade. As graduation will affect certain preferential treatment and domestic infant industries, Bangladesh has to handle this prudently to make the transition sustainable.

This transition does not necessarily mean that all the trade-related facilities will be curtailed overnight. Bangladesh is getting an exceptionally extended period of five years—the standard period is three years—to prepare for the aftermath of graduation. It must make the best out of the LDC-specific facilities while it still can. Developing countries also enjoy some trade preferences, which could be used to the fullest if Bangladesh is well-prepared with the needed homework.

In order to remain competitive and keep the economic growth rate steady after 2026, Bangladesh should focus on knowledge-based economy, utilise demographic dividends, mobilise local resources, ensure congenial business environment, shift towards manufacturing high-value goods, promote export-oriented industries, and increase regional and global connectivity. The country must make plans to turn the challenges into opportunities in the coming days. The absence of tailored and clearly defined roadmaps for addressing the post-graduation challenges and post-pandemic economic recovery may make Bangladesh a victim of the "middle-income trap."

Hussain Shazzad is a strategic affairs and foreign policy analyst.