ISLAMABAD: The Ministry of Finance has unveiled a strategic action plan to deepen Pakistan’s local currency bond market, targeting greater predictability in government debt issuance, stronger secondary-market liquidity, a broader investor base and reforms to financial-market infrastructure and taxation.
The Strategic Action Plan for the Development of the Local Currency Bond Market (LCBM) was developed by the Finance Division’s Debt Management Office (DMO) in partnership with the State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), Pakistan Stock Exchange (PSX), Central Depository Company (CDC) and National Clearing Company of Pakistan Limited (NCCPL).
The plan, published in September 2026, fulfils a commitment under Pakistan’s IMF-supported programme to identify bottlenecks to LCBM development and publish a strategic action plan by the end of September 2026. The government said the reforms are aimed at creating a deeper, more liquid and resilient market for government securities and, over time, corporate securities denominated in Pakistani rupees.
Domestic borrowing dominates government financing
The government remains heavily dependent on domestic markets for its fiscal and development financing requirements.
According to the plan, 91.6% of gross government borrowing of Rs34.2 trillion in FY2025 was raised domestically, while banks held around 78% of government securities. Sovereign securities accounted for approximately 62% of banking-system assets.
The Finance Division noted that this concentration has supported government securities auctions but has also encouraged banks to hold securities rather than actively trade them, while limiting their capacity and incentives to extend financing to the private sector.
The diagnostic found that Pakistan has established much of the institutional infrastructure required for an emerging local currency bond market, but market outcomes remain closer to those of a developing market.
The report identified secondary-market liquidity, primary-market predictability, the investor base, and elements of the legal and regulatory framework as key areas requiring further development. It described the narrow investor base as the largest gap.
IMF-World Bank diagnostic flags market weaknesses
The joint IMF-World Bank diagnostic underpinning the plan identified several structural weaknesses.
In the money market, banks have increasingly relied on central bank liquidity to finance securities holdings, leaving repo activity concentrated around the horizons of SBP liquidity operations. The government said this limits the development of market-making, short selling and derivatives.
In the primary market, auctions are operationally effective, but accepted volumes for individual instruments can differ from announced targets. The plan argues that greater consistency between announced and accepted volumes could improve predictability and price discovery.
Secondary-market trading is active up to five years, but liquidity becomes thin at longer maturities. Meanwhile, the existing primary dealer framework rewards turnover more clearly than executable quoting.
The investor base was identified as the biggest structural weakness, with low pension coverage and insurance penetration restricting demand for longer-duration fixed-rate securities. Foreign and retail participation also remain modest.
The plan also highlighted fragmentation in financial-market infrastructure, noting that conventional securities settle through PRISM+, while Sukuk use PSX, CDC and NCCPL. According to the government, this separation divides collateral pools and constrains collateral mobility, securities lending, repo and market-making.
Five strategic objectives
The government has established five broad objectives for the LCBM reform programme: strengthen institutional capacity and coordination; make primary issuance more predictable and market-based; develop executable secondary-market liquidity and a functioning private repo market; broaden the investor base; and modernise market infrastructure while removing legal and tax impediments.
Implementation will be overseen through an LCBM Steering Committee chaired by the Finance Secretary, with senior representation from the SBP and SECP and participation from institutions including PSX, CDC, NCCPL and the Federal Board of Revenue where relevant.
A DMO-led Technical Group will track milestones, prepare progress reports and escalate delays to the Steering Committee. The implementation roadmap is to specify actions, responsible institutions, sequencing and milestones, while the DMO will report publicly on progress every six months.
Auction reforms to target greater predictability
One of the most immediate areas of reform is the government securities auction process.
The plan calls for publication of target volume ranges with predefined allocation bands, followed gradually by instrument-specific targets as market depth improves. The government also plans to reduce delays in announcing auction results and commit to a fixed release time.
A benchmark policy covering eligible securities and target ranges is also to be published, alongside a transparent framework for liability-management operations.
The action plan sets a June 2027 deadline for improved auction predictability for short-term debt, with the reform extending to medium- and long-term debt by June 2028.
It also sets December 2026 as the target for reducing delays in auction-result announcements and establishing a fixed release time, while a benchmark policy is targeted for June 2027.
Secondary market reforms
The government plans to strengthen secondary-market trading by allowing eligible bank customers to trade exchange-listed government securities through their banks.
The primary dealer framework for FY2027/28 will also be reviewed, with secondary-market performance, including quote performance drawn from E-Bond, incorporated into scoring.
Authorities will assess the feasibility of a securities-lending facility for primary dealers, while SBP and PSX are expected to publish daily, security-level post-trade reports covering conventional government securities and Sukuk, with historical data available for analysis.
The government has set June 2027 as the target for improved post-trade transparency and review of the primary dealer framework for the FY2027/28 cycle.
Foreign and retail participation to be expanded
The action plan seeks to broaden participation beyond banks by strengthening institutional, foreign and retail investor channels.
The DMO will formalise its investor-relations function and re-engage foreign investors, building on Pakistan’s inclusion in the J.P. Morgan GBI-EM Edge Index, with a longer-term objective of eligibility for major global local-currency government bond indices.
The government also plans to advance insurance and pension reforms, expand retail channels including InvestPak, digital access through brokers and mutual funds, and government bond exchange-traded funds.
The review of National Savings products will examine operational costs, investment ceilings and their interaction with the government securities market, while digital channels for National Savings investors are also expected to be expanded.
Infrastructure consolidation under review
The government will review the wholesale architecture of the government securities market, including whether a single register for all marketable government securities operated through SBP could improve efficiency and settlement while preserving broker and exchange access.
The review comes as the government transitions towards greater use of Shariah-compliant financing, with the plan noting that Sukuk issued through PSX could increasingly dominate the debt portfolio.
The action plan also calls for completion of the electronic link between the Debt Management and Financial Analysis System (DMFAS) and PRISM+, with weekly reconciliation of registers through an exception report.
Tax and legal reforms
Several proposed measures target legal and tax barriers that currently affect repo, securities lending and government securities investment.
The plan calls for statutory provisions confirming repo as collateralised lending and clarifying the treatment of manufactured payments, securities lending and rehypothecation.
It also proposes apportioning coupon and discount income at redemption so that withholding tax applies only to the return accrued during the final holder’s ownership period.
The government further plans to align the tax treatment of government securities held through collective investment schemes with direct investment, while maintaining a simple and competitive tax treatment for nonresident investors.
Three-phase implementation
The reforms will be implemented in three phases.
Phase I, covering the first 12 months, will focus on establishing governance structures, adopting the implementation roadmap, strengthening DMO capacity, improving auction communication and post-trade transparency, facilitating nonbank repo participation and reviewing the primary dealer framework.
Phase II, covering 12 to 24 months, will focus on repo documentation, securities-lending facility design, financial-market infrastructure architecture, the DMFAS-PRISM+ link and legal and tax reforms.
