On March 16, 2018, Bangladesh has attained all the three criteria to graduate to a developing country. This is a major leap forward for Bangladesh, after upgrading to “Lower Middle Income” category by increasing its Gross National Income (GNI). The announcement was made by Committee for Development Policy (CDP), a United Nations Panel in its First Triennial Assessment meeting at the UN headquarters in New York. The declaration has demystified US statesman Henry Kissinger's famous description of the country being a ‘bottomless basket case’. This, no doubt, is indicative of the strength of the Bangladesh economy, and lays a good foundation for going forward towards the final graduation out of the LDCs in 2024 following the two successive triennial reviews by the CDP in 2021 and 2024.

The LDC category was introduced by the United Nations in 1971 when there were 25 LDCs. In 2018, the number has increased to 47. So far, only five countries were able to graduate from the LDC group, including Botswana, Cape Verde, Maldives, Samoa and Equatorial Guinea. Bangladesh is the only country that met all three criteria for graduation including GNI per capita, Human Assets Index, and Economic Vulnerability Index.

However, this is just the beginning of the graduation process. The CDP will review the status based on these criterion in 2021 and finally in 2024. If Bangladesh can retain this status till then, it will be finally earn the developing status in 2024. After that, the country will have a 3-year transition period when the impact assessment of the graduation will be conducted.

Graduation out of the LDC bloc will pose a number of challenges for Bangladesh. Consequently, issues of smooth graduation, graduation with momentum and sustainable graduation assume paramount importance for the country. If Bangladesh is able to maintain the current dynamics, it will be able to graduate in the year 2024 with significant momentum. Graduation with momentum will enable Bangladesh to ensure that graduation remains sustainable as Bangladesh embarks on its post-2024 developmental journey. At this juncture, graduation with momentum is so critically important for Bangladesh. If this is to be ensured, Bangladesh will need to take adequate preparation so that graduation with momentum leads to sustainable graduation.

What are the facilities Bangladesh enjoyed as an LDC ?

The institutional initiatives through which Bangladesh, as an LDC, receives preferential treatment may be categorized into four groups:

• World Trade Organization (WTO) provisions providing Special And Differential Treatment (SDT): There are 139 SDT provisions benefitting developing countries in the WTO agreements of which 14 are specific to LDCs;
• Autonomous, non-reciprocal initiatives through various countries’ Generalized System of Preferences (GSP) schemes, such as those of the European Union (EU) and Canada;
• preferential market access initiatives that are part of various Regional Trade Agreements (RTAs) that have special provisions for members that are LDCs, such as the South Asian Free Trade Area (SAFTA), the Asia and Pacific Trade Area (APTA) and Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area;
• Bilateral trade initiatives like the ones between India and Sri Lanka and India and Bhutan.

Bangladesh has been able to take significant advantage of the preferential market access provided under the aforesaid initiatives. Lower-duty or duty-free entry has given Bangladesh’s exportables a competitive edge in those markets. Thanks in part to such access, Bangladesh has been able to achieve phenomenal growth of her exports, particularly since the early 1990s, and has emerged as a leading exporter of apparels in the global market. Export-oriented sectors account for about two-fifths of manufacturing investment and employment in Bangladesh. The contribution and importance of trade from the perspective of employment generation, income augmentation and economic growth in Bangladesh cannot be overemphasized.

How losing LDC status would cost Bangladesh?

The support measures portal for the LDCs maintained by the CDP chalks out 136 LDC-specific International Support Measures (ISMs) across the fields of trade and market access, development finance, transfer of technology and technical assistance. Unless negotiated separately with relevant partners, the ISMs will be phased out in 2024.

The most crucial challenge Bangladesh is likely to encounter after the graduation is erosion of preferential market access. Bangladesh enjoys duty-free access to the European market under the “Everything But Arms” initiative. Since developed country markets account for about 90% of Bangladesh’s total exports, preferential market access in these countries is of special significance to Bangladesh. The European market is a huge opportunity for Bangladesh RMG sector since 64% of total apparel export goes to the European market.

Bangladesh receives duty-free market access for all products in all developed countries except for the apparel exports to the USA. Even some developing countries such as India provide duty-free market access for all products, and China for more than a thousand tariff lines. Estimates carried out for the aforesaid CPD study indicate that Bangladesh will face an additional 6.7 percent tariffs in absence of LDC treatment resulting in a possible export loss of USD 2.7 billion (equivalent to 8% of the country’s global export in FY2015). The adverse impacts will be most telling in the EU market where 97.8% of Bangladesh’s exports currently enter duty-free.

Having graduated, Bangladesh will not be eligible for support measures accorded to LDCs accorded by multilateral institutions such as the WTO. Special and differential treatment for the LDC members will no longer be available to Bangladesh (in the form of market access, technical assistance, waivers from obligations, protracted implementation period in view of implementing obligations and commitments). Bangladesh will also not be eligible for support for the LDCs under aid for trade, and aid for trade facilitation and support under the enhanced integrated framework (EIF) window of the WTO.

After graduation in 2024, there will be a grace period of another 3 years when Bangladesh can enjoy all LDC-specific benefits. So there are approximately 10 years for the country to prepare itself to start the new journey. Bangladesh needs to prepare for a smooth graduation by taking into account a few issues.

What are the facilities Bangladesh will be entitled to as a developing country?

Tariff schemes before and after graduation, largest world importers (2016) that grant LDC‐specific preferences

After 2027, provided that it ratifies 27 conventions on human and labour rights, environment and governance, Bangladesh may be expected to gain access to the Generalised System of Preferences Plus (GSP+), giving it dedicated preferential tariff rates.

The impact of any tariff increases would, however, be divided between exporters and importers, meaning that European clothing companies may pay some or all of the difference. Bangladeshi exporters are confident that the country will remain competitive over the medium term against major comparators like Vietnam, reducing the importance of tariff preferences. Business leaders say that tariff advantages are not the key obstacle to export success, and that a number of other economic challenges are more important, including infrastructure, the exchange rate and the outlook for the global economy.

An increasing volume of garment production is being offshored from China, providing additional opportunities for countries like Bangladesh. Meanwhile the economy is gradually diversifying, particularly into services, which do not face goods tariffs and which are therefore less affected by LDC graduation.

Several stakeholders suggest that the improvement to Bangladesh’s image on the world stage from graduation would give it a better credit rating, allowing it to borrow more cheaply on world markets. Moody’s rating agency currently ranks the country as Ba3, which is below investment grade and assigns Bangladesh’s bond the ‘high-yield’ or ‘junk’ status, although the outlook is stable. Infrastructure investment is a pressing priority given the country’s traffic congestion, high and growing population and the rapid pace of development.

Managing graduation from the LDC category: The case of the Maldives’ fish exports

When the Maldives approached graduation from the least developed country (LDC) category in the 2000s, the impact of graduation on market access for fish products moved to the forefront of the debate.

CDP Recommendation for LDC graduation: 2003

Endorsement of graduation by UN: 2004

Graduation: 2011

• As the margin of tariff, preference for fisheries in the key market of the European Union is high and Maldives is not a beneficiary of other trading arrangements in major markets (with the exception of the South Asia Free Trade Agreement), the government and industry worried that graduation would have a negative effect on fish production and processing.
• After a three-year transition period, the country lost duty-free quota-free access to the European Union on 1 January 2014, after having already lost preferences in Japan in 2011.
• Moreover, in 2015 the Maldives lost access to the generalized System of Preferences (GSP) in the EU due to its achieving upper middle-income status, further increasing tariffs.

Significant drop in exports of unprocessed fish before graduation in 2011, but a rapid recovery afterwards

Pre-graduation drop and subsequent recovery was to a large extent caused by an increase in exports to Thailand, the world’s largest tuna-processing country. Exports to the European Union declined slightly since the phasing out of preferences in 2014, but are still significantly higher than before graduation in 2011.

Processed fish (mainly tuna fillets) has become the main import from the Maldives over time, whereas prepared fish (mainly canned tuna) remains rather constant.

• Utilization for fish products under the duty-free quota-free scheme (the Everything but Arms Initiative) was very high; with a utilization rate above 99% between 2005 to 2013. However, in 2014, when the Maldives only had access to ordinary GSP rates, the utilization rate dropped to 84%.
• After the MFA was dismantled in 2004, the Maldives was no longer cost competitive in the garment sector despite having duty-free quota-free access to the EU. This serves as a reminder that in economic diversification, productive capacity is often more important than preferential market access.
• Government of the Maldives also highlighted that the while the withdrawal of preferential market access created challenges, the country managed to maintain export volumes after graduation