The Second Page of Pakistan's Local Currency Bond Market: The Liquidity Crisis Hidden Behind Issuance

I opened the 17-match ledger, and the grid corrected my memory.

In the last week of September 2026, Pakistan's Ministry of Finance released a document. The title: 'Strategic Action Plan for Pakistan's Local Currency Bond Market.' A commitment under the IMF-supported programme. But the part of this document that received the least attention is its 'second page'—where it is admitted that this market is actually running on the borrower's demand, not the investor's demand.

As I was reading this document from Chattogram, I remembered 2026. I had maintained a 17-match ledger on Chittagong Abahani's 4-2-3-1 pressing lines. Every phase, every zone, every trigger—I logged it all. When someone said 'Abahani is playing attacking football,' I would open the grid and show—actually they were holding the ball in midfield and controlling the tempo. Pakistan's bond market is exactly the same. While everyone sees the record issuance numbers and says 'the market is deepening,' I look at the grid—how much of this depth is actually illusory.

Context: The pitch on which the game is being played

In FY2025, Pakistan's gross borrowing was Rs34.2 trillion. Of this, 91.6 percent came from domestic sources. Banks held around 78 percent of government securities. Sovereign paper accounted for about 62 percent of banking-system assets.

These numbers might suggest a maturing market. But the very next line in the document admits: 'This concentration has supported government securities auctions, but it has also encouraged banks to hold securities rather than actively trade them and has constrained their capacity and incentives to extend financing to the private sector.'

In other words, the pitch is ready, but the style of play is one-dimensional. Banks are buying bonds, but there is no market to sell them. The liquidity that would allow buyer-seller negotiation is absent.

Core analysis: Auction price, but market emptiness

The document's central admission: Pakistan's money market redistributes liquidity but does not finance securities positions in the manner seen in larger emerging markets. Banks have increasingly relied on central-bank liquidity to finance securities holdings. Repo activity remains concentrated around the horizons of SBP liquidity operations.

In football tactics, the equivalent is—a team only gets the ball, but has no passing options. Because all players are static. No speed, no movement, no space creation. Pakistan's bond market has prices, but the price discovery process is weak.

The document admits: 'The existing primary-dealer framework rewards turnover more clearly than executable market quotations.' That is, the dealer who just churns paper gets more points. The dealer who gives real quotes—on both sides of the bid-ask—gets less.

This is a structural distortion. And this distortion is why executable liquidity is not being created in the market.

Predictability of primary issuance: Schedule vs reality

The document contains an important reform proposal: reducing the delay in announcing auction results and establishing a fixed release time by December 2026. Also, a benchmark policy and transparent liability-management framework by June 2027.

These reforms are seemingly administrative. But from my 15-column match-note template, I know—a seemingly small change can sometimes change the entire gameplay. In 2026, when I first refused to publish any diagram without a timestamped source, my posting pace slowed. But later, when I analyzed international tournaments, every match became comparable.

Publishing auction results at a fixed time means market participants know in advance when information will arrive. This accelerates price discovery. But this alone is not enough. Because the document itself says: 'Instrument-specific targets will initially be introduced for shorter maturities and expanded as market depth improves.'

In other words, because there is no long-term liquidity, long-term predictability cannot be created. This is a deadlock.

Secondary market: The pitch where no one is passing

The document clearly admits: trading is relatively active in securities with maturities of up to five years, but beyond that, liquidity becomes thin.

I have seen this pattern many times in football tactics. A team high-presses for the first 30 minutes, but after 60 minutes the pressing line collapses. Because energy drops, the bench is not deep, or there is no tactical adjustment. Pakistan's long-term bonds are exactly like that—there is a price on day one, but in the secondary market no one wants to buy.

The document proposes a solution: assessing the feasibility of a securities-lending facility for primary dealers. Target: assessment by September 2027, design and launch decision by September 2028.

This is an important acknowledgment. Because market-making does not work without securities lending. A dealer who cannot borrow securities cannot short sell, cannot quote, cannot take risk. In football, it is exactly like a defender cannot advance without ball possession.

Institutional investor crisis: The pension and insurance link

One of the most important admissions in the document: low pension coverage and insurance penetration have restricted demand for longer-duration fixed-rate securities.

This is a structural weakness. Because pension funds and insurance companies are the natural buyers of long-term bonds. They want long-term assets to meet 20-30 year liabilities. But in Pakistan, pension coverage is low, the insurance sector is contracted.

The document states that SECP's insurance-sector reform programme and pension reform agenda are to be expedited, with concrete milestones.

The success of this reform will depend on the pace of implementation. From my 2026 'empty stadium audit' experience, I know—no matter how beautiful the plan on paper, when applied on the field, acoustic changes occur. The coach's shout is heard, but if the player does not understand the instruction, there is no benefit. The same applies to pension reform—creating rules does not create a market, you have to create trust.

Contrarian angle: Not a liquidity crisis, but a pricing crisis

Now I come to the part where the conventional explanation breaks down.

Many analysts say the core problem of Pakistan's bond market is the lack of liquidity. The document says the same. But I see a different pattern in the grid.

In FY2025, 62 percent of banking-system assets are in government paper. This concentration is an abnormal situation. When one team controls the entire midfield, the question is—where is the opposing team? Answer: not on the pitch.

Here, by opposing team, I mean private-sector credit. The document itself admits that banks' 'capacity and incentives' for private-sector lending have been 'constrained.'

But is the liquidity crisis only a secondary-market problem? Or is there a structural flaw in price determination at its core? If a bank knows it will need central-bank liquidity in three months, why would it buy long-term bonds? It will play short-term, where the price relationship with central-bank operations is most intimate.

In the document, 'repo activity remains concentrated around the horizons of SBP liquidity operations'—this sentence is a bombshell. It means Pakistan's repo market is actually an echo of the central bank's window. An independent interbank repo market has not developed.

This is why the document calls for adoption of the 2026 Global Master Repurchase Agreement (GMRA) with Pakistan-specific provisions. A robust legal opinion is to be obtained. SECP will identify and address obstacles preventing eligible non-bank investors—especially money-market mutual funds—from participating in repo.

But here is a fundamental question: if liquidity is largely central-bank dependent, why would market participants repo with each other? The answer is—they either do not have securities, or they do not have surplus liquidity. For a healthy repo market, you need a group that has securities but no cash, and another group that has cash but needs safe assets. In Pakistan's case, the first group (banks) holds securities and goes to SBP for liquidity. The second group (pension funds, insurance) is virtually absent. As a result, the need for an interbank repo market does not arise.

This is a demand-side crisis. And the solution is not just in documentation or legal reform.

Market infrastructure: Two registers, one fragmented pool

Another important admission in the document is the division in settlement architecture. Conventional securities settle through PRISM+, while Sukuk use infrastructure involving PSX, CDC and NCCPL. The government says this separation is not standard international practice and fragments the collateral pool.

The result—collateral mobility, securities lending, repo and market-making become limited.

I find a lesson here from my own country's football. When clubs in the Bangladesh Premier League used separate stadiums, each stadium's pitch was different—one fast, one slow. Home-team advantage depended on which stadium the match was played in. Pakistan's bond market has PRISM+ and Sukuk infrastructure just like two different pitches. An investor who knows how to play on one pitch becomes off-pace on the other.

The document proposes a solution: reviewing the target wholesale architecture. One option under consideration is a single register for all marketable government securities operated through SBP, while preserving broker and exchange access. Decision targeted for September 2028.

This decision is coming very late. If Pakistan wants to be included in the J.P. Morgan GBI-EM Edge Index, this infrastructure division is a major obstacle. Because global index providers evaluate settlement efficiency and transparency.

Tax and legal framework: Where investors get lost

The document contains a tax proposal: apportioning coupon and discount income at redemption so that withholding tax applies only to the return accrued during the final holder's period of ownership.

This proposal is seemingly technical. But its impact is deep. Currently, if a bond is issued at 10% coupon and the market price rises, an investor who buys at 8% yield faces tax on the total return at maturity. This inequality discourages trading in the market. Because an investor looking to buy in the hope of price appreciation knows the tax system will penalize him.

The document further states: tax treatment of government securities held through collective investment schemes will be aligned with direct investments. This measure is targeted for inclusion in the 2028-29 budget.

The 2028-29 budget means—two years. What happens to market participants in these two years? Will they invest amid tax uncertainty, or wait? This uncertainty is a major loss in market dynamism.

The 17-match ledger and implementation risk

The document divides implementation into three phases: laying foundations in the first 12 months, principal market reforms in 12-24 months, deepening participation beyond 24 months.

The targets are ambitious. But the risks are also acknowledged: renewed inflation, fiscal pressures, institutional capacity constraints, coordination challenges and disruptions from liquidity, settlement and tax reforms.

When I was creating my 15-column match-note template in 2026, I did not know that this template would give me comparative advantage in analyzing international tournaments the following year. Similarly, if Pakistan's strategic action plan is implemented properly, the market will move at a different pace after 2028.

But the word 'if' is as ephemeral as football tactics. A team sets up a plan and takes the field, but if it concedes the first goal, the entire gameplay collapses. If Pakistan's fiscal situation worsens further, if inflation rises again, these reforms will be delayed.

The document has a timeline: LCBM Steering Committee by November 2026. Detailed implementation roadmap by December. Fixed time for auction result release by December. PKRV methodology publication by March 2027. Updated DMO staffing and career framework by February.

Takeaway: What to watch in the next match

In my 2026 'empty stadium audit,' I learned—real change is understood only when the noise subsides and only the sound remains. In Pakistan's bond market, that noise is now the record numbers of auctions and debt issuance. But the sound—secondary-market velocity, presence of institutional investors, independence of the repo market—is largely silent.

The success of this action plan should be measured by three indicators. One: volume of private repo transactions by 2027. Two: volume of pension and insurance sector investment in government securities. Three: secondary-market turnover of bonds with maturities over five years.

The ledger is now open. The grid awaits the right column. And the right column will come only when an independent repo market develops—and pension funds begin to see government bonds as a tool to meet long-term liabilities. Otherwise, this market will boast of record issuance, but will never achieve the real pace of the game.

When someone says 'Pakistan's bond market is at record highs,' I will look at the grid—which column records that high. And which column is an empty page.