Pakistan's Three-Phase Rupee Bond Reform: A Market Where 78 Percent of Buyers Are One Buyer

In fiscal year 2026, Pakistan's government raised a gross Rs34.2 trillion in borrowing, and 91.6 percent of it came from the domestic market. Reading the same account from another angle stops you cold: banks hold roughly 78 percent of government securities, and sovereign paper accounts for about 62 percent of banking-system assets. That gap between a wide market and a narrow list of buyers is the central problem of Pakistan's local currency bond market. The Strategic Action Plan the Ministry of Finance unveiled in Islamabad on Tuesday is a roadmap to close it. Announcement and implementation, however, are two different things, and the plan itself admits as much.

The document is formally titled the Strategic Action Plan for Pakistan's Local Currency Bond Market. It was prepared by the Debt Management Office (DMO) of the Finance Division, working with the State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP), the Pakistan Stock Exchange (PSX), the Central Depository Company (CDC) and the National Clearing Company of Pakistan Limited (NCCPL). The ministry claims it fulfils the government's commitment under its International Monetary Fund (IMF)-supported programme to identify bottlenecks in the local currency bond market and publish a strategic action plan by the end of September 2026.

The plan rests on a joint IMF-World Bank diagnostic that examined four layers of the market: the money market; the primary and secondary government securities markets; the investor base; and the financial-market infrastructure plus the legal and regulatory framework. Its message is simple. Pakistan's bond market does not lack paper; it lacks a diverse set of buyers. Two further problems grow out of that shortage: thin secondary-market liquidity and banks' habit of holding securities rather than trading them.

The ministry itself concedes that concentration has helped government securities auctions run smoothly. But the same concentration encourages banks to park paper on their balance sheets instead of trading it actively, while limiting both their capacity and their incentive to lend to the private sector. Here lies the plan's first indirect admission: bank dependence is comfortable for the government as a borrower, but expensive for the economy as a whole.

The plan sets five broad objectives. First, strengthen institutional capacity and coordination. Second, make primary issuance more predictable and market-based. Third, develop executable secondary-market liquidity and a functioning private repo market. Fourth, diversify the investor base. Fifth, modernise market infrastructure by removing legal and tax impediments. Implementation is largely set for the next two years, with some measures extending beyond September 2028.

Oversight goes to a new LCBM Steering Committee chaired by the Finance Secretary, with senior representatives of the SBP and SECP as members. The PSX, CDC, NCCPL and the Federal Board of Revenue (FBR) will participate as relevant. A DMO-led technical group will maintain the action plan, track milestones, prepare progress reports and escalate delays to the Steering Committee. The detailed implementation roadmap must be prepared by December 2026 and published on the Finance Division's website, and the DMO will report publicly on progress every six months through its half-yearly and annual debt bulletins.

On paper I first sketch three pillars: liquidity, buyers, infrastructure. The plan's first major pillar is the private money market and securities-financing infrastructure. The diagnostic found that Pakistan's money market redistributes liquidity but does not finance securities positions the way larger emerging markets do. Banks increasingly rely on central-bank liquidity to finance their securities holdings, while repo activity clusters around the horizons of SBP liquidity operations. The government believes this limits market-making, short selling and the development of derivatives.

The remedy includes adopting the 2026 Global Master Repurchase Agreement (GMRA) with appropriate Pakistan-specific provisions, or revising the domestic master repo and netting agreements. A robust legal opinion must be obtained on the enforceability of the resulting documentation under Pakistani law. SECP will identify and address the regulatory, operational, tax, documentation and commercial obstacles that keep eligible non-bank investors out of repo transactions, initially focusing on money-market mutual funds. The government will continue Treasury Single Account reforms, strengthen cash-flow forecasting, and assess whether temporary cash surpluses could be placed by the DMO in short-term money-market instruments.

The second pillar is predictability in primary issuance. The government will publish target volume ranges alongside predefined allocation bands. Instrument-specific targets will start with shorter maturities and expand as market depth improves. Bids must be accepted within the announced ranges at the market-clearing price, with deviations confined to published allocation bands.

The authorities also want to cut the delay in announcing auction results and fix a release time by December 2026. A benchmark policy covering eligible securities and target ranges, plus a transparent framework for liability-management operations, is targeted for June 2027. The DMO will further assess investor demand and constraints across instruments and maturities, including banks' ability to absorb additional fixed-rate duration. Those findings will feed into the financing mix and maturity structure of the Medium-Term Debt Strategy (MTDS), updated annually.

The third pillar is secondary-market liquidity, and here the diagnosis is at its sharpest. Trading is relatively active up to five-year maturities, but liquidity thins out beyond that point. The diagnostic found the existing primary-dealer framework rewards turnover more clearly than executable market quotations. For fiscal year 2027/28, the framework will therefore be revised so that secondary-market performance — including quote performance derived from E-Bond — carries greater weight.

The government will also assess the feasibility of a securities-lending facility for primary dealers to improve access to scarce securities and support market-making, with an assessment targeted for September 2027 and a design-and-launch decision by September 2028. For transparency, the SBP and PSX will publish a daily, security-level post-trade report covering conventional government securities and Sukuk, with historical data made available for analysis.

The methodology behind the Pakistan Revaluation Rates (PKRV) will also be published, followed by a review of the yield-curve framework to determine whether separate methodologies are needed for revaluation, market pricing and benchmark purposes. A significant step will be enabling eligible bank customers to trade exchange-listed government securities through their banks, with responsibility assigned to the SBP, SECP, PSX and CDC and implementation targeted by December 2027.

The fourth pillar — the investor base — is identified as the plan's weakest point. Here I sketch a second pillar: pensions and insurance. Low pension coverage and low insurance penetration have limited demand for longer-duration fixed-rate securities, while foreign and retail participation remains modest. The Steering Committee will engage relevant authorities on pension and insurance-sector reforms so that institutional demand for longer-dated government paper grows. SECP's insurance-sector reform programme and pension reform agenda must be expedited, with concrete milestones written into the implementation roadmap.

To broaden retail participation, the plan points to InvestPak, digital access through brokers and mutual funds, and government bond exchange-traded funds (ETFs). The National Savings framework will also be reviewed. The review of Central Directorate of National Savings (CDNS) products will cover operating costs, investment ceilings across product windows, and the interaction between National Savings products and the government securities market. An action plan is targeted for December 2026, adoption for June 2027, and implementation after that.

On international recognition, the plan refers directly to Pakistan's inclusion in the J.P. Morgan GBI-EM Edge Index, with a longer-term objective of meeting eligibility requirements for major global local-currency government bond indices. That objective is the plan's most unforgiving yardstick, because index inclusion means passive foreign flows — and those arrive only when auction rules, settlement finality, tax clarity and liquidity are credible at the same time.

On infrastructure, the plan surfaces an old dilemma. Conventional securities currently settle through PRISM+, while Sukuk use infrastructure involving the PSX, CDC and NCCPL. The government says this separation is not standard international practice and fragments collateral pools, limiting collateral mobility, securities lending, repo and market-making. The Finance Division will therefore lead a review with the SBP, SECP and PSX of the target wholesale architecture. One option under consideration is a single register for all marketable government securities operated through the SBP, while preserving broker and exchange access. A decision is targeted for September 2028.

Separately, the SBP will review whether existing arrangements allowing eligible non-bank financial institutions to access PRISM+ and settlement services are sufficiently efficient and secure. The electronic link between the Debt Management and Financial Analysis System (DMFAS) and PRISM+ must be completed, with weekly reconciliation through exception reporting.

The legal and tax agenda is substantial. The central aim is to reduce obstacles to repo, securities lending and investment through collective investment schemes (CIS). The authorities want coupon and discount income apportioned at redemption so that withholding tax applies only to the return accrued during the final holder's period of ownership. Another proposal is to align the tax treatment of government securities held through collective investment schemes with direct investments, while maintaining simple and competitive treatment for non-resident investors. These tax measures are targeted for the 2028-29 budget.

The Finance Division and SBP will also update their fiscal agency agreement and clarify the respective regulatory responsibilities of the Finance Division, SBP and SECP. The legal basis for dematerialised holdings and settlement finality will be assessed and strengthened where necessary, while efforts continue to complete netting legislation.

Implementation is divided into three phases. Phase I — Foundations, the first 12 months: establish the Steering Committee and technical group, adopt the implementation roadmap, strengthen DMO capacity, improve auction communication and post-trade transparency, facilitate non-bank repo participation and review the primary-dealer framework.

Phase II — Principal market reforms, months 12 to 24: repo documentation, securities-lending facility design, the financial-market infrastructure architecture decision, completion of the DMFAS-PRISM+ link, and legal and tax reforms. Phase III — Deepening participation, beyond 24 months: institutional investor demand through pension and insurance reforms, greater foreign participation and progress towards global index eligibility.

The earliest deadlines read like this: the LCBM Steering Committee by November 2026; the detailed implementation roadmap by December 2026; a fixed release time for auction results by December 2026; an updated DMO staffing and career framework by February 2027; publication of the PKRV methodology by March 2027. Major market-infrastructure and securities-financing reforms extend through September 2028 and beyond.

The risk list comes from the ministry itself: renewed inflation, fiscal pressures, institutional capacity constraints, coordination challenges, and disruptions from liquidity, settlement and tax reforms. Mitigation is described as phased implementation, stronger DMO capacity, cross-institutional oversight, prior market consultation and regular public reporting.

Now to the point where the plan's own logic stands against itself. I first build the case for Pakistan's current model, because you cannot see an opponent's weakness until you understand the opponent.

A bank-dependent borrowing structure is in fact an advantage, and the plan wants to dismantle it — while its own implementation still depends on banks. Consider this: nearly all of the Rs34.2 trillion in borrowing is domestic, and roughly 78 percent of it is bought and held by a handful of banks. In that system, auctions never fail, yields do not jump suddenly, and the government's cost of borrowing stays predictable. In market language this is captive demand, where the buyer does not set the price but accepts it. Broadening the investor base will take that comfort away: real price discovery begins at auction, yield volatility rises, and the government may have to pay more when the fiscal deficit is widest.

So the plan's central conflict is not about liquidity; it is about demand. As long as the pension and insurance sectors stay thin, there is no genuine buyer for long-dated fixed-rate paper — only banks, which do not want to carry duration. The plan is honest precisely here: it admits the investor base is the largest gap. But the things needed to close that gap — pension reform, insurance penetration, restructuring retail savings — sit in the furthest phase. In other words, the principal problem has the most delayed solution.

There is also a gap in the culture of disclosure. The plan fixes a release time for auction results, publishes the PKRV methodology and promises security-level post-trade reporting — all reforms in the right direction. But the question at the centre of all of it goes unanswered: what does the captive-buyer model actually cost Pakistan's fiscal accounts? How much private-sector lending has been crowded out? The data published for the market will not, at the same time, say anything about the balance between a bank's investment book and its loan book. Rule transparency is rising; balance-sheet transparency is not.

The implementation timeline invites doubt too. The primary-dealer framework revision targets fiscal year 2027/28; the securities-lending design decision targets September 2028; the single-register decision targets September 2028; tax reforms target the 2028-29 budget. The most transformative decisions have been pushed beyond the next electoral cycle and any political change that may follow. Where fiscal pressure is greatest, the reform clock runs slowest — that timeline is the most telling part of the plan.

Still, fairness matters. Three things separate this plan from earlier papers. One, it stands on an international diagnostic, so the problems are named precisely. Two, every step is tied to an institution and a date, making accountability harder to dodge. Three, and most important, the government itself concedes that its borrowing structure is squeezing credit to the private sector — a rare admission in Pakistani policymaking.

Sketching the market's picture from Rajshahi, my sense is that this plan will be judged not by one grand reform but by three small alignments: whether the December 2026 roadmap contains specific pension and insurance milestones; whether the March 2027 PKRV publication genuinely improves benchmark usability; and whether primary-dealer evaluation truly starts weighting quotes over turnover. Those three small changes will set the direction of the larger structure.

The question ahead is not simple. If, after the Steering Committee is formed in November 2026, the December 2026 roadmap leaves pension and insurance milestones blank, then what remains is an excellent auction calendar, a clean tax draft and a debate about a new register — in other words, paper reform. But if pension reform genuinely advances, then by 2028 the number of buyers in Pakistan's bond market will grow, the yield curve will lengthen, and J.P. Morgan index eligibility will stop being merely a declaration. One yardstick will show which road Pakistan takes: how many new buyers step forward to buy paper outside the auction, and outside bank balance sheets.