Interim govt to finalise post-LDC survival plan by October

The interim government is moving forward with finalising a post-LDC survival strategy by October as ministries continue to work on the draft transition plan for Bangladesh's graduation from the least developed country (LDC) status in 2026.

Despite calls from business leaders to delay the graduation following the fall of the Awami League government on 5 August, no instructions have been issued to postpone the timeline.

The Economic Relations Division (ERD) has sought input from various ministries to develop the strategy, which will outline steps for the country's transition both before and after graduation.

Several officials involved in the graduation process, speaking on condition of anonymity, told TBS that they are proceeding under the assumption that the graduation will occur in 2026.

They say the Ministry of Commerce has begun drafting policies on subsidies for fisheries and agriculture, while the Finance Division is working on alternatives to cash incentives for the export sector.

The UN Committee for Development Policy (UNCDP), responsible for determining LDC status, meets every three years and has its next session in November.

If Bangladesh wishes to postpone its 2026 graduation, it must submit a well-justified application before that meeting, officials said.

Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office and member of the interim government's economic white paper drafting committee, told TBS, "An application to delay the graduation will not be accepted if we claim the previous government based its decision on incorrect statistics. Even with statistical errors or discrepancies, Bangladesh's position would still surpass the threshold for LDC graduation."

He added, "Arguments that Bangladesh is unprepared or that its exports will suffer post-graduation will also not be valid as commercial benefits will remain available in key markets, including the European Union, even after graduation."

Recently, Finance Advisor Dr Salehuddin Ahmed told reporters that LDC graduation is a significant milestone, emphasising that it involves several requirements. He stressed the need for the relevant ministries and departments to actively engage in meeting those requirements.

Inforgraph: TBS

Five strategic pillars for a smooth transition

The LDC Graduation Smooth Transition Strategy (STS), drafted in June, outlines a roadmap for Bangladesh to shift from reliance on preferential tariffs and low-cost competitiveness to a more robust economic model driven by innovation, quality, and export diversification.

To achieve this transformation, the STS is built on five key pillars – ensuring macroeconomic stability, securing trade preferences and favourable transition measures beyond LDC graduation, improving trade competitiveness, enhancing productive capacity, and strengthening international partnerships and cooperation.

Bangladesh needs to remove administrative inefficiencies, reduce business costs and enhance trade negotiation capacities to offset the post-LDC loss of preferential market access, which is feared to cut the country's exports by 14%, it says.

For a smooth transition, Bangladesh needs to move towards a structurally transformed and globally competitive economy, which calls for a strategic approach to ensure accelerated inclusive growth, dynamic industrialisation, and enhanced global trade competitiveness, the draft strategy elaborates.

It identifies key principles that include promoting structural transformation to avoid the middle-income trap and considering evolving global trends.

'High-road approach' to economic transformation

According to the draft STS, though LDC graduation will end trade preferences with potential export loss, it offers Bangladesh a chance to modernise its trade policy and industrial strategy, shifting focus to innovation and quality to emerge even stronger globally.

"This transition can drive sustainable growth by prioritising compliance and environmental sustainability," it says.

Graduation offers a chance to enhance competitiveness amid shifting trade patterns and geopolitical tensions, for which Bangladesh needs to strengthen its economic fundamentals and drive structural transformation.

It suggests the concept of the "high-road economic development" strategy that emphasises the enhancement of productivity, innovation, and quality standards rather than relying just on low-cost competition.

This approach advocates investments in education, skills development, and technology to build a highly skilled workforce as well as improvement in labour standards, environmental protection, and social equity.

The high-road economic transformation approach relieves the pressure of low wages and cost-cutting on standards and compliance, ultimately building brand value to become a competitive economy.

Incorporated as an LDC in 1975, Bangladesh is set to graduate from the group on 24 November 2026 after meeting UN criteria. Earlier in 2015, the country moved from low-income to lower-middle-income status, according to the World Bank classification of global economies.

While it will be a milestone achievement, graduation from LDC will mean Bangladesh will lose the WTO's support measures, such as duty-free market access that covers around 73% of the country's exports.

This will put an end to export subsidies which helped export industries, apparel in particular, thrive over the decades.

Looming fears of losing out to Vietnam in the EU market

Bangladesh does not get any trade preference to its biggest market, the USA, while the European Union, a destination for 45% of Bangladesh's exports, provides very generous LDC preferences. So, the overall post-graduation implications for Bangladesh will critically depend on how Bangladesh faces tariffs in the EU market, the draft strategy points out.

Other major markets such as the UK, Canada, India, Japan, Australia, and China that offer LDC-specific preferences also greatly matter to Bangladesh.

Bangladesh will become less competitive than Vietnam in the EU market, it warns.

"While tariff hikes are anticipated for Bangladesh after its LDC graduation, other countries through free trade agreements could gain further competitiveness, especially in Bangladesh's largest export market, the EU. For instance, Vietnam – already a top apparel exporter –  now has an FTA with the EU, which entered into force in August 2020."

Vietnam will see tariffs on its clothing exports to the EU gradually decline from the current average of 9% to eventually zero, while Bangladesh may see its average tariff rising from currently zero to around 11% once the three-year post-LDC transition period ends in 2029, it points out, elaborating how the Asian neighbour stands to benefit from its FTA with the EU.

It cites the US market where Bangladesh's market share has risen despite the lack of tariff preferences.

"Additionally, the evolving nature of trade policies of partner countries means all preferences may not be lost simultaneously and can be extended in some cases," it says, referring to the EU and the UK's offer for a three-year transition period for graduating LDCs.

Quality matters, high tariff wall won't help

The draft STS explains how the protective tariff regime has kept Bangladesh's industries less competitive and why the country needs to negotiate hard to strike preferential trade deals with key markets to prevent loss of market to potential competitors such as Vietnam.

It finds that domestic products often do not meet the quality requirements of global markets, reducing their competitiveness for export.

"Consequently, non-garment producers, especially those with limited resources, are discouraged from pursuing export opportunities," it says.

Least bothered about product standards and shielded by high tariff protection, local producers feel less enthusiastic about product quality and innovation, losing export potential. But that does not affect their local sales, it says.

"For example, many global buyers have ceased sourcing leather products made from local hides due to their failure to comply with global environmental standards, yet products intended for the domestic market remain unaffected."

The draft transition strategy finds Bangladesh's tariff structure highly protective and anti-export bias which has helped local industries at the cost of hurting the export sector. A high tariff wall has made the domestic market attractive to investors and producers, with import-competing activities enjoying 30% higher incentives than export sectors in terms of effective exchange rate, it points out.

It asks for changes in the industrial policy approach which, "by disincentivising exports and shielding domestic industries from competition," prevents local sectors from being competitive and innovative.

"In a developing country like Bangladesh, the role of trade and industrial policy in promoting its domestic industries cannot be overlooked, but very high protection sustained over many decades seems to suggest not helping them prepare for the global market as their export response remains limited," it says.