MB Subba 

Even though Bhutan will lose specific trade benefits and entitlements after graduation from the group of Least Developed Countries (LDC) in 2023, such losses will be minimum, states the recently launched Diagnostic Trade Integration Study Update 2020.

Despite the Covid-19 pandemic, Bhutan is well on track to graduate from the club of Least Developed Countries (LDCs) in 2023 coinciding with the end of the 12th Plan, according to the UN’s Committee for Development Policy (CDP).

Published by the Department of Trade and UNDP Bhutan, the report states that the unprecedented socio-economic impacts of the Covid-19 pandemic may dampen and exacerbate challenges to Bhutan’s sustainable transition. But it adds that the UN’s Committee for Development Policy could take a holistic view to review progress made by graduation aspiring LDCs.

Despite its disadvantageous geographical location, Bhutan has progressed well on the socio-economic front. This, the report states, will serve as a cushion for the adverse impacts that may be encountered after its graduation.

Bhutan will continue to enjoy the same level of market access with India even after graduation given the tariff concessions the former receives from the latter under the bilateral trade agreement, according to the report.   

Bhutan’s graduation will also not affect its market access to its relatively important markets—Bangladesh and Nepal—due to the South Asian Free Trade Agreement (SAFTA) and bilateral trade agreements.

Graduation from LDC is a significant breakthrough aimed at opening new development pathways. But it also brings a new set of challenges, as countries stand to lose specific benefits and entitlements they used to enjoy as LDCs.

These benefits, according to the report, include support for concessionary development finance and technical assistance, trade preferences, and special and differential treatment with respect to various multilateral trade rules and regulations.

Upon graduation, they lose access to many privileges and International Support Measures (ISMs), exclusively available for LDCs, such as withdrawal of certain unilateral and non-reciprocal trade preferences granted under Duty-Free Quota-Free (DFQF) schemes (preferential market access provided to LDCs by developed countries).

However, Bhutan is different from many other LDCs—the bilateral agreement with India, with whom it has an overwhelming trade dependence, will remain effective even after LDC graduation.

Most of the Overseas Development Assistance (ODA) consisting of grants, concessional loans and untied aid are also not strictly linked to a country’s LDC status, which means that Bhutan could continue to receive them even after graduation, according to the report. The World Bank has classified Bhutan as a lower-middle-income country, and the status may remain even after graduation.

Given its good performance in cutting poverty incidence by two thirds in the last decade, its high average annual GDP growth and a GNI per capita of USD 3,080 in 2018, the graduation may impact concessional loans that the Asian Development Bank (ADB), the World Bank, and other financial institutions have been providing.

However, the report adds the situation will be different with donor countries, where the concessional loans or grants come in view of larger political engagement and bilateral relations.

Bhutan’s graduation is anticipated to result in the loss of technical and financial support but the likelihood of drastic cuts in external development assistance is not expected in the bilateral context.

As an LDC, Bhutan receives DFQF preferences from developed as well as some developing countries, despite the fact that it is not a WTO member today. “After graduation, Bhutan will lose these DFOF preferences.”

However, less than 10 percent of its exports are to countries that grant DFQF Thus, upon graduation, Bhutan will lose its zero-duty market access to these markets, which is mainly in the European Union (EU).

Bhutan, however, will still be eligible for the EU’s Generalized System of Preferences (GSPs), reduced rates of duties granted by developed countries like the EU to developing countries.

The report identified that the largest export reduction post-graduation will be to the EU market.

However, it adds that the total losses in exports will be smaller due to the increase of Bhutan’s exports to India. It is projected that there will be a substantial shift in Bhutan’s export destinations, from the EU towards India, which will be concentrated in minerals, metals and chemicals.

“Part of a smooth graduation strategy is to continue to benefit from DFQF market access to developed countries, including the EU for three more years after its official graduation,” the report recommends.

In most cases, except for primary agricultural products, minerals and ores, it would be difficult for Bhutan to qualify for GSP.

An official said that nothing was “confirmed” yet on Bhutan’s graduation in view of the pandemic but added that Bhutan’s earlier official position stood.

The graduation thresholds must be met for any two of the three criteria—Gross National Income (GNI) per capita, Human Assets Index (HAI) and Economic Vulnerability Index (EVI)—in two consecutive triennial reviews. Bhutan’s GNI per capita is estimated at USD 2,982 in 2021, which is almost three times the graduation threshold of USD 1,222.

The country’s current HAI score (index of education and health used as an identification criterion for LDCs) is estimated at 79.4, which is above the required score of 66. The EVI is now 25.7, which is well below the graduation threshold of 32.

Edited by Tshering Palden