Bhutan to Forgo UN's Least Developed Country Tag: What Does This Mean?

An official told The Quint that even as Bhutan is on the verge of graduation, it is grappling with a lot of issues.

In 13 December 2023, Bhutan will quit the club of world's poorest countries, becoming only the seventh nation to graduate from the band of Least Developed Countries (LDC) set up by the United Nations (UN) in 1971.

"We are taking it with a lot of honour and pride. We are not nervous," Bhutan's Prime Minister Lotay Tshering told news agency AFP at the LDC summit that took place in Doha last week.

So, how did the Himalayan kingdom achieve this feat? And what will such a move mean for the country? Read on.

How Does UN Define LDC Countries?

LDCs are nations listed by the UN that exhibit the lowest indicators of socioeconomic development across a range of indexes.

• All LDCs have a gross national per capita income (GNI) of below $1,018

• These countries also have low scores on the indicators such as nutrition, health, literacy, school enrolment, and high scores for economic and environmental vulnerability

How Many Countries Are on the LDC List Currently?

There are currently 46 LDCs, according to the World Economic Forum (WEF). Some of India's immediate neighbouring countries, including Afghanistan, Myanmar, and Nepal, figure on the list.

The list is reviewed every three years by the UN Economic and Social Council. Six countries have graduated from LDC status between 1994 and 2020.

Both inclusion and graduation from the LDC category is based on three criteria:

• GNI per capita

• Human Assets Index (HAI), measuring health and education outcomes

• Economic and Environmental Vulnerability Index

However, there is no automatic application process for graduation from the list. The UN Committee for Development Policy (CDP) conducts a review of the LDCs every three years – and countries that reach the graduation threshold levels for two of the three criteria in two consecutive triennial reviews become eligible.

After the CDP advises on graduation for an LDC, a preparatory period of three years, or more in exceptional cases, is prescribed through which the countries continue to receive assistance and benefits, after which it is phased out.

How Did Bhutan Graduate From the List?

According to local news reports, Bhutan first fulfilled the requirements for graduation eight years ago – in 2015, and then again in 2018. Bhutan was, therefore, scheduled to graduate in 2021.

However, the UN viewed Bhutan’s request to match the effective graduation date with the conclusion of the nation’s 12th national development plan in 2023 as a legitimate request, and thus, postponed the delisting.

Hydroelectric power production, forestry, and agriculture, are the primary sectors. According to the UN, the country saw a robust economic growth over the decade between 2010 and 2019 with more than 5 percent average annual GDP growth. This growth has also translated into substantial reductions in poverty.

The agency added that the number of people living on less than $3.20/day has dropped from 36 percent in 2007 to 12 percent in 2017. This rate of poverty incidence is the second-lowest in the region and far below the South Asian average, according to the UN.

"The country meets all graduation criteria and continues to make steady progress on GNI and HAI," it said.

Is it All Good News?

An official from the Finance Ministry of Bhutan, who wanted to remain anonymous, told The Quint that even as the country is on the verge of graduation, there are a host of problems the nation is grappling with.

The tourism sector, which is one of the main sources of revenue, has been devastated by the pandemic – and "the numbers are yet to recover", he said.

According to The Telegraph, Bhutan has begun allowing tourists to buy 20 grams of duty-free gold in a move to woo Indians (who are the largest group of tourists to visit the country) to the nation.

Tenzing Lamsang, Editor-in-Chief of Bhutan-based newspaper The Bhutanese, pointed out other wider implications of the move.

In an editorial for the newspaper, he noted that even Bangladesh, which has a resilient economy among LDC countries in terms of population and GDP, has delayed its graduation till 2026. He said that PM Tshering's optimistic tone contrasted with the more desperate tone of other LDC countries leaders who talked about the problems in their countries and the impact of the COVID-19 pandemic and climate change, among others.

He added that while the PM's speech alluded to climate change and inflation, he did not mention the mass migration to Australia and Middle East, the declining foreign reserves (the country banned import of most vehicles in August last year), low tourism numbers, and the poor state of the Bhutanese economy.

How Can the Change in Status Affect Loans and Grants?

Bhutan's Finance Ministry official told The Quint that concessional loans and grants from the World Bank and the Asian Development Bank could be affected for Bhutan going forward as "donors and financial institutions often monitor a country’s need by its development status at the UN". 

Additionally, the official pointed out that Bhutan is not a member of the World Trade Organisation (WTO), and as a result, it does not enjoy any tariff waivers and flexibilities accorded under the WTO Special and Differential Treatment provisions in exports or on accession negotiations.

Therefore, the official reasoned, Bhutan will have to fulfill strict obligations in the WTO if it wants to accede to the group after graduating from the LDC group.

The Bhutanese's Lamsang fears challenging terms of trade for Bhutan, "with a possible loss of trade preference with the EU, Japan, Thailand and other potential export markets". There could be a substantial tariff hike for dairy products, vegetables, and fruits in the EU, Japan, and Thailand after Bhutan graduates, he noted.

In terms of attracting foreign investment, Bhutan has had limited success, the Finance Ministry official said.

In 2015, only 0.4 percent of the GDP was attributed to FDI (foreign direct investment). The country recorded a 40 percent decline in FDI in 2021, according to The Bhutanese.