To IMF or not to IMF? Reform is the question

In the 1980s, India was driving economic growth through budget deficits and foreign borrowing. Then the Gulf War broke out in 1990, sending oil prices soaring and causing remittances from Gulf countries to fall sharply. India was also grappling with political instability, short-lived governments and the assassination of Rajiv Gandhi.

By mid-1991, the country's foreign exchange reserves had fallen to barely enough to cover two to three weeks of imports. Rating agencies downgraded India, and access to commercial credit dried up. For the first time since independence, India stood on the brink of defaulting on its foreign debt.

To avert default, the government shipped gold abroad in two installments.

In May 1991, around 20 tonnes of gold were transferred through the State Bank of India to Swiss bank UBS, under an arrangement that allowed India to buy the gold back later.

Then, in July 1991, the Reserve Bank of India pledged around 47 tonnes of gold to the Bank of England and the Bank of Japan to raise several hundred million dollars.

News of gold being flown out of the country became a symbol of national humiliation for Indians.

P V Narasimha Rao became prime minister in June 1991 and appointed economist Manmohan Singh as finance minister. Within weeks, the rupee was devalued by around 18–19% in two stages.

The government also introduced a new industrial policy that abolished industrial licensing, known as the “Licence Raj”, in most sectors, automatically permitted up to 51% foreign ownership in priority sectors and eased restrictions on the expansion of large companies. Over the following years, import tariffs were gradually reduced, banking reforms began, and capital markets were opened up.

An IMF standby arrangement was also in place during this period.

The IMF imposed conditions, but the government took responsibility for designing the reforms and bearing their political costs. It viewed the conditions as an opportunity to undertake reforms that had been long overdue.

Within a year, foreign exchange reserves recovered, the pledged gold was returned, and India repaid its IMF loan. The foundations for the country's high growth over the following three decades were laid in 1991.

South Korea

The Korean War had ended eight years earlier, but South Korea had yet to recover fully from the devastation. Per capita income was less than $100 a year, lower than in many African countries. Its exports consisted largely of wigs, plywood and fish. Much of the government's budget depended on US aid, which was also declining.

In 1961, Park Chung-hee came to power. By the mid-1960s, he began introducing reforms. The currency was brought to a more realistic level, and exports became a national priority. The president personally chaired monthly export review meetings. Companies that met their export targets received low-cost loans; those that failed had their credit cut off.

In 1973, South Korea launched its Heavy and Chemical Industry drive. POSCO emerged in steel, Hyundai expanded into shipbuilding, and the country invested in petrochemicals and electronics. Much of this expansion was financed through foreign borrowing.

But Park made one mistake: investment became excessive, and the second oil shock struck at the same time. The economy contracted, and inflation exceeded 20%. Then, in October 1979, Park was assassinated by his own intelligence chief.

The new military government imposed severe budget cuts, froze wages and merged excess industrial capacity. By the end of 1985, South Korea's foreign debt had reached $46.8 billion, equivalent to around 56% of its gross national product (GNP). It was the world's fourth-largest debtor nation, alongside Brazil, Mexico and Argentina. At the time, those Latin American countries were defaulting one after another.

South Korea, however, did not default. For two decades, it had not simply borrowed to finance consumption. The crisis was real, but the factories built with borrowed money were selling ships, steel, cars and televisions around the world. In 1986, circumstances also turned favourable: oil prices fell, international interest rates declined, and the won remained weak. For the first time, South Korea recorded a substantial trade surplus, which the government began using to repay expensive debt ahead of schedule. In just four years, by 1989, total debt had fallen to $29.4 billion, while net debt was close to zero.

A decade of success bred confidence, and confidence gave way to complacency. In the 1990s, the family-controlled conglomerates, also known as chaebols, began to believe they were too big to fail. They were expanding by borrowing four to five times their own capital. Newly established merchant banks were borrowing dollars from abroad for three to six months and investing the money in projects with ten-year horizons.

In January 1997, Hanbo Steel collapsed, followed by Kia Motors. When Thailand's currency crisis erupted in July, foreign banks panicked. None wanted to roll over South Korea's short-term loans. By the end of November, the central bank's usable reserves had nearly run out, and the won lost almost half its value within weeks.

South Korea then turned to the IMF, which assembled what was, at the time, the largest rescue package in its history. In December, 1997, South Korea signed an agreement with the Fund for a package worth around $57 billion, subject to a series of stringent conditions. Interest rates were to be raised to around 30%, alongside strict fiscal tightening, while insolvent financial institutions were to be closed.

More than half of the country’s 30 merchant banks eventually shut down. Restrictions on foreign ownership were to be lifted, and layoffs made easier under a framework negotiated through tripartite talks involving the government, employers and labour representatives. The agreement also required corporate debt-to-equity ratios to be reduced to two-to-one, a condition that eventually contributed to the collapse of Daewoo, South Korea’s second-largest conglomerate, in 1999.

Many South Koreans still remember that period as a time of “national humiliation”.

Two weeks later, Kim Dae-jung was elected president. He had spent decades in opposition, endured imprisonment and even faced a death sentence. He had the greatest political opportunity to capitalise on public anger over the IMF's conditions.

Instead, he took the opposite path: he adopted reform as his own programme, brought government officials, business leaders and labour representatives to the negotiating table to secure legislation allowing layoffs, and told the chaebols to reduce their debt or break up.

Then came a scene remembered even beyond South Korea. In the winter of 1998, a nationwide gold-collection campaign began. Housewives, retired soldiers and athletes queued outside banks. Some brought wedding rings, others gold spoons received when their children celebrated their first birthdays, and still others medals they had won during their lives. Within weeks, around 3.5 million people contributed more than 200 tonnes of gold.

The amount was small compared with the country's debt, but the message was extraordinary: the country's debt was everyone's debt.

In 1998, the economy contracted by nearly 5%, unemployment doubled, and Daewoo, the country's second-largest chaebol, collapsed.

But growth returned in 1999 at a rate of nearly 11%. In August 2001, South Korea repaid its final IMF instalment, almost three years ahead of schedule. The IMF later acknowledged that the initial increases in interest rates and fiscal tightening had been more severe than necessary.

South Koreans did not forget the resentment, but they turned the humiliation into an opportunity to rebuild.

Two stories of failure

In 2016, Egypt's economy was in a difficult position. Foreign exchange reserves had dwindled, dollars were unavailable in the curb market, and importers were unable to clear their goods. In November that year, the government entered a $12 billion IMF programme, part of a broader package of around $21 billion. Under these conditions, the Egyptian pound was sharply devalued, subsidies were cut, and fiscal austerity began.

On paper, the programme appeared successful. Growth returned, reserves increased, and Egypt regained access to international bond markets. But much of the foreign capital that flowed in did not go into exports or factories. Instead, it went into high-yield, short-term government treasury bills, a form of investment known as “hot money”.

The government increased spending on a new administrative capital and massive infrastructure projects. Its promise to make room for the private sector did not translate into meaningful action. State-owned enterprises and businesses linked to the military retained their strong commercial presence.

Between 2012 and 2022, Egypt's external debt more than quadrupled, rising from 14% to 34% of GDP. Over the same period, the share of private creditors in its external debt increased from 8% in 2016 to 28% in 2022.

Then Russia's invasion of Ukraine began in early 2022, while the US Federal Reserve started raising interest rates. More than $20 billion in hot money flowed out of Egypt in just three months. The Egyptian pound came under renewed pressure, inflation surged, and, six years after its previous bailout, Egypt was back at the IMF's door.

A new programme was agreed in December 2022. When the crisis persisted, the programme was expanded to around $8 billion in March 2024.

That was not all. In the same month, Egypt signed a $35 billion deal with the United Arab Emirates, granting development rights over around 40,000 acres in the Ras El Hekma area on the Mediterranean coast. Many viewed the deal as raising questions about Egypt's sovereignty over its land. The crisis eased temporarily, but Egypt still faced around $35 billion in external debt repayments in 2024 alone.

Pakistan

Pakistan first entered an IMF programme in 1958. The $7 billion programme it secured in 2024 was its 25th.

Almost every programme has featured the same promises: bringing agricultural income and retail businesses into the tax net, reducing the accumulated liabilities of the power sector—known as “circular debt”—and reforming loss-making state-owned enterprises, including the national airline, Pakistan International Airlines (PIA).

The pattern has been remarkably consistent. A crisis forces the government to seek an IMF programme. It takes partial measures to unlock loan instalments, then backs away when elections or political pressure intervene. After a while, another crisis follows.

Recent years offer a clear illustration of this cycle. In 2019, Imran Khan's government entered a $6 billion IMF programme. In early 2022, under political pressure, the government froze fuel and electricity prices at reduced levels, in violation of the programme's conditions. The IMF suspended disbursements.

Meanwhile, the government changed, floods struck, and by early 2023, foreign exchange reserves had fallen to barely enough to cover a few weeks of imports. Pakistan was on the brink of default. At the last moment, the crisis was contained through a $3 billion short-term IMF programme in July 2023 and the renewal of deposits from Saudi Arabia, China and the UAE.

The following year brought Pakistan's 25th IMF programme.

Throughout this period, the tax-to-GDP ratio remained stuck at around 10%, while successive governments borrowed anew to repay the debts inherited from their predecessors.

Which path will Bangladesh take?

Placing these four stories side by side reveals one fundamental lesson: whether a country approaches the IMF does not, in itself, determine its destiny.

India, South Korea, Egypt and Pakistan have all borrowed from the IMF under difficult conditions. The difference lies in how they approached those conditions. 

India and South Korea viewed them as an opportunity to undertake long-overdue reforms. Egypt and Pakistan treated them as obstacles to securing loan instalments. The governments in the first group accepted political responsibility for reform, while those in the second shifted the blame onto the IMF.

Bangladesh recently sought a $4.5 billion loan from the IMF covering the period from December this year to December 2029, with an agreement expected by the end of this year.

As the country enters a new round of discussions with the Fund, this is the first and most important question: who will design the reforms, and who will take political ownership of them?

If today's policymakers believe they can solve the crisis while retaining the very system that created it, then, with due respect, history offers no such example. A stagnant system cannot deliver prosperity or resolve the problems it has created. The experiences of India and South Korea show that reform is never a one-off exercise. Whenever a crisis has emerged and further reform has become necessary, political wisdom has required leaders to press ahead rather than retreat.

Another lesson concerns how borrowed money is used.

Even when South Korea had become the world's fourth-largest debtor, it did not default because the factories built with borrowed money were earning dollars. By contrast, Egypt's borrowing went into a new capital and major projects, while Pakistan's went towards repaying old debt and financing current consumption.

The benefits of many of Bangladesh's major projects over the past decade and a half have also been largely domestic. This raises an important concern: if a country borrows heavily to build massive infrastructure that generates no adequate return, or spends borrowed money on consumption or subsidies, the outcome will not merely be disappointing. It could push the country towards insolvency.

There is also the question of who will bear the burden of reform.

In South Korea, the government, employers and workers sat around the same table to share the pain, while ordinary citizens joined the effort by contributing their gold. In Pakistan, the burden has repeatedly fallen on ordinary consumers, while powerful groups have remained outside the tax net.

If the beneficiaries of loan defaults, capital flight and tax exemptions in Bangladesh are not brought within the scope of reform, and the government meets IMF conditions primarily by raising electricity and fuel prices, reforms designed merely to satisfy the lender will lose public support and be abandoned at the first sign of political pressure.

We should remember that India has not returned to the IMF since 1991, while South Korea repaid its loan almost three years ahead of schedule. Their reform efforts did not end when their IMF programmes concluded. In Egypt and Pakistan, by contrast, reform efforts stalled once the immediate demands of securing loan installments had been met.

The question facing Bangladesh, therefore, is not whether to remain with the IMF or walk away. The real question is whether this programme will pave the way for it to be the last—or merely lay the groundwork for the next one.

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***Murad Kibria is a writer and chartered accountant.