Graduation to the list of developing countries: Decisions must be based on reality

To qualify for graduation to the final list of developing countries, a nation must meet three essential criteria. Bangladesh has successfully met all of these conditions. After being under observation for several years, Bangladesh is set to officially graduate to the developing country category in 2026. This will be the most significant economic achievement for the country since its independence. No nation wants to remain a least developed country (LDC) indefinitely. Every country aspires to graduate to the developing nation category as quickly as possible. While LDCs receive certain benefits from developed nations, these privileges are often granted out of a sense of charity rather than respect. Thus, achieving developing country status is a matter of national pride.

However, the reality is that no country can transform overnight into a developing or developed nation simply by desire. While we sincerely hope that Bangladesh attains developing country status and eventually progresses toward becoming a fully developed nation, the key question remains: How credible and realistic are the economic indicators that have enabled Bangladesh to qualify for this transition? During the tenure of the previous government, economic statistics were often inflated to create an illusion of development and impress the public. Many of these figures lacked a solid basis. Bangladesh is now on the verge of graduating to a developing nation based on such misleading statistics. It is crucial to conduct a thorough cost-benefit analysis of this transition. A leading business association in the country had previously called for a ten-year delay in the graduation timeline. However, the interim government is determined to proceed with the transition as scheduled in 2026.

At a recent event in the capital, Dr. Fahmida Khatun, Executive Director of the Centre for Policy Dialogue (CPD), explained how economic statistics were manipulated during the previous government's tenure. She highlighted that most of the economic success figures presented were exaggerated or fabricated to project an image of rapid development. The government even tried to position Bangladesh as a "role model" for other developing nations. A prime example is export statistics. The figures published by the Export Development Bureau (EDB) often did not match those provided by Bangladesh Bank. Every year, institutions like the International Monetary Fund (IMF), World Bank, and Asian Development Bank (ADB) would forecast Bangladesh’s GDP growth, but the government would report a figure that was at least 1% to 1.5% higher. At the end of the fiscal year, neither side would adjust its stance. However, the GDP growth rate of a country in a specific year cannot have two different values. Similarly, foreign and domestic investment statistics were inflated, while sensitive data such as inflation and unemployment rates were downplayed. According to the Bangladesh Bureau of Statistics (BBS), the number of unemployed people in the country is around 2.6 million. Such a claim is difficult to believe. The BBS often published data according to government directives rather than actual figures.

Similarly, Bangladesh Bank's reported foreign exchange reserves were not always accurate. The central bank included funds loaned to the Export Development Fund (EDF) and other sectors in its reserve calculations, inflating the reported figures. However, when the IMF approved a $4.7 billion loan for Bangladesh, it mandated a more transparent calculation of reserves. According to IMF regulations, any funds that the central bank cannot immediately use should not be considered part of the official reserves. This requirement forced Bangladesh Bank to adopt a net-based reserve calculation.

The Securities and Exchange Commission (BSEC) conducted foreign "roadshows" to attract foreign investment in the capital market, spending significant amounts of money. However, the public was never informed about the actual investment inflows resulting from these promotional events. Bangladesh was often portrayed as an investment-friendly destination, but the reality was different. The incentives that made Bangladesh attractive for foreign investment, such as duty-free access under the Generalized System of Preferences (GSP), may disappear after the transition to a developing country.

Once Bangladesh officially graduates from LDC status, it will lose various international trade privileges. Currently, Bangladesh benefits from duty-free GSP access to 27 European Union (EU) countries. Although the EU has stated that Bangladesh will continue to receive GSP benefits until 2029, transitioning to the GSP+ program afterward will require meeting stringent conditions, which may be difficult for Bangladesh. If GSP+ privileges are not secured, Bangladesh’s exports to the EU could decline significantly. A CPD study estimates that Bangladesh may face an annual financial loss of $8 billion due to the loss of LDC privileges.

After graduating to the developing country list, Bangladesh will also have to borrow from international financial institutions at commercial interest rates rather than concessional rates. Loan conditions will become more stringent. Additionally, foreign direct investment (FDI) inflows may decline. One of the main reasons foreign investors have been interested in Bangladesh is its access to GSP benefits. Bangladesh's domestic market is growing, and consumer spending capacity is increasing. However, foreign investment is not solely driven by these factors. Many multinational corporations invest in Bangladesh to manufacture products for export to the EU without paying tariffs.

For example, an American company investing in China must pay a minimum 12% tariff when exporting goods to the EU. However, if the same company establishes a factory in Bangladesh, it can export to the EU tariff-free due to GSP benefits. Former U.S. President Donald Trump imposed higher tariffs on Chinese, Canadian, and Brazilian products. As a result, many foreign companies considered shifting investments away from China. Even Chinese companies looked for alternative investment destinations. Ideally, Bangladesh should have been a top choice for such investments, but if it loses GSP benefits, foreign companies may no longer see it as an attractive destination.

LDCs like Bangladesh receive various concessions from developed nations. However, once a country graduates to the developing nation category, these privileges are withdrawn. Bangladesh’s export industry heavily depends on the EU and the U.S., which account for over 80% of total export earnings, primarily from the ready-made garment sector. Previously, the U.S. provided Bangladesh with a quota system for exports, but this was replaced by limited GSP benefits in 2005. However, the U.S. later suspended Bangladesh’s GSP privileges due to labor rights violations in the garment industry.

While CPD estimates suggest an $8 billion annual economic loss due to LDC graduation, the actual impact could be even greater. Decisions regarding this transition should not be driven by emotions. Simply achieving developing country status is not enough; Bangladesh must also ensure it can sustain this progress. Several countries have lost their developing country status after failing to maintain economic stability. For instance, Nepal initially graduated to the developing country category but was later downgraded to LDC status due to its inability to handle natural disasters effectively.

Thus, Bangladesh must proceed with careful consideration. Achieving developing country status is a significant milestone, but it must be backed by real economic strength, not just statistical manipulation.

M. A. Khaleque: Retired Banker & Economic Analyst