LDC graduation: an economic cliff?

As Bangladesh approaches its scheduled graduation from the least developed country (LDC) category
in November 2026, a sense of unpreparedness hangs over both the
government and the private sector. The milestone represents a recognition of
progress on three key United Nations criteria: per capita income, human assets,
and economic vulnerability. To qualify for graduation, a country must meet at
least two of these three thresholds in two consecutive triennial reviews.
Bangladesh has distinguished itself as the first country to achieve all three
criteria in both the 2018 and 2021 reviews.
On
the income front, Bangladesh's per capita gross national income has reached an
estimated $2,684, well above the 2024 graduation threshold of $1,306. Its Human
Assets Index, which measures outcomes in health and education, scored 77.5
against a required threshold of 66, reflecting progress in literacy rates and
reductions in under-five mortality. The Economic Vulnerability Index, which
assesses resilience to shocks, stood at 21.9, comfortably below the threshold
of 32. Taken together, these figures underscore the resilience and growth that
have made graduation possible. Yet many economists and industry leaders warn
that inadequate preparation and the slow pace of reforms could turn this
milestone into an economic shock, weakening the country's competitiveness in
global value chains.
MA Razzaque, chairman of the Research
and Policy Integration for Development (RAPID), has voiced particular concern.
He argues that while Bangladesh has earned graduation, the real danger lies in
wasted time and lack of urgency. "When it comes to reforms, the pace is
painfully slow—and that is where the real risk lies," he said.
There
are some steps being taken. According to Anisuzzaman Chowdhury, special
assistant to Chief Adviser Prof Muhammad Yunus, a new steering committee is
working on policy formulation and identifying bottlenecks in critical areas
such as garments, pharmaceuticals, and port operations. The committee meets
weekly with industry representatives and makes visits to factories to
understand challenges firsthand. Reforms have already yielded some progress:
port operations have been streamlined so that pharmaceutical raw materials now
clear in days instead of months.
Dormant
regulatory bodies, such as the Drug Control Committee, have been revived, and
the National Single Window, which links 19 government agencies, has become
functional, issuing 40,000 certificates in just two months. Still, Chowdhury
acknowledged that these efforts are not sufficient to overcome all the
challenges in such a short time. He also noted that cash incentives to
exporters, currently a lifeline for many, may not be permissible under World
Trade Organisation rules once Bangladesh graduates, making it necessary to
design new indirect incentives.
The
greatest concern remains the loss of preferential trade benefits that have
underpinned the country's export-led growth. At present, 73 percent of
Bangladesh's exports enjoy duty-free access to 38 countries under the LDC
framework. Nowhere is this advantage more important than in the European Union,
which alone accounts for 48 percent of Bangladesh's exports. Graduation
threatens to bring an abrupt end to these preferences.
While
there will be a three-year transition period in the EU and the UK, tariffs
could rise to between 9.6 percent and 12 percent in the EU by 2029, 16 percent
and 18 percent in Canada, and 7.4 percent and 12.8 percent in Japan. Economists
estimate that the combined effect could reduce annual exports by as much as $8
billion, roughly 14 percent of total exports.
To
mitigate these risks, the government has introduced the Smooth Transition
Strategy (STS), a comprehensive plan with five strategic pillars and 157
actions. The plan has received praise from the UN Committee for Development
Policy for its scope and ambition.
Yet,
implementation has been slow. Razzaque points out that without a robust
accountability framework, reform inertia will persist, leaving the STS as
little more than words on paper. He argues that Bangladesh is not yet in a
position to absorb the blows of lost preferential tariffs and subsidies, and
that reducing the cost of doing business is essential if exporters are to find
any competitive edge from within. He insists that securing trade agreements and
qualifying for the EU's GSP Plus scheme are no longer optional but essential
for survival. Intellectual property rights protection is another neglected area
where Bangladesh could easily be caught unprepared, leaving local businesses at
risk.
Progress
on trade agreements has been particularly disappointing. Securing preferential
access is a core element of the STS, yet little has been achieved in practice.
Bangladesh has signed only one preferential trade agreement, with Bhutan in
2020. Negotiations with key partners, such as India, Japan, South Korea and
China are ongoing, but none have yet resulted in a deal. Japan has even stated
that it will only sign an Economic Partnership Agreement after Bangladesh
graduates, leaving the country exposed during the critical transition. At the same time, efforts to secure
GSP Plus status in the EU remain bogged down in compliance requirements on
labour rights, governance, and environmental standards.
The
impacts of graduation will be felt unevenly across sectors. For the garment
industry, which makes up more than 80 percent of the country's exports, the
EU's three-year transition period under GSP Plus offers a small but crucial
window to diversify markets and comply with new standards.
The
pharmaceutical sector, however, faces an immediate shock. Under the WTO's TRIPS
agreement, LDCs currently enjoy a waiver that allows them to manufacture
patented medicines without registering them. After graduation, this flexibility
will end, requiring local companies to register all patented drugs. The process
is costly and time-consuming, and could result in significantly higher medicine
prices.
Tapan
Chowdhury, managing director of Square Pharmaceuticals, has warned that the
country needs business readiness rather than simply celebrating the graduation
milestone. Abdul Muktadir, president of the Bangladesh Association of
Pharmaceutical Industries, has added that the industry, which has only recently
begun producing its own raw materials, requires at least two additional years
to prepare.
With
time running short, groups such as the International Chamber of
Commerce-Bangladesh are preparing to formally request a deferment of graduation
to allow more time for preparation.
Razzaque
of RAPID has summed up the situation candidly. "Preparations for
graduation have been quite limited, with both the government and the private
sector falling behind," he said. For Bangladesh, the achievement of
graduation is real and significant, but unless urgent reforms are undertaken,
the transition could well resemble an economic cliff.
















