Government sets out reforms to improve government securities trading, broaden the investor base, strengthen repo markets and modernise financial infrastructure.
ISLAMABAD: The Ministry of Finance has unveiled a Strategic Action Plan for the Development of the Local Currency Bond Market (LCBM), seeking to create a deeper, more liquid, transparent and diversified market for government securities and, over time, corporate securities denominated in Pakistani rupees.
The plan was developed by the Debt Management Office (DMO) of the Finance Division in collaboration 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). It was published in September 2026.
The initiative fulfils a commitment under Pakistan’s IMF-supported programme to identify bottlenecks affecting the development of the local currency bond market and publish a strategic action plan by the end of September 2026.
Banks dominate government securities holdings
Pakistan remains heavily reliant on domestic markets to meet its fiscal and development financing requirements. In FY2025, 91.6 per cent of Rs34.2 trillion in gross government borrowing was raised domestically.
Banks held around 78 per cent of government securities, while sovereign securities represented approximately 62 per cent of banking-sector assets. The Finance Ministry said this concentration supports government securities auctions but can encourage institutions to hold securities rather than actively trade them, while limiting banks’ capacity and incentives to finance the private sector.
Six areas targeted for reform
The joint IMF-World Bank diagnostic identified weaknesses across six key areas: the money market, primary market, secondary market, investor base, financial market infrastructure, and the legal and regulatory framework.
In the money market, banks have increasingly relied on central bank liquidity to finance securities holdings, resulting in repo activity being largely cash-driven and concentrated around SBP operations. This has constrained market-making, short selling and derivatives activity.
The government plans to make primary-market borrowing more predictable through clearer volume targets and allocation bands. In the secondary market, authorities aim to improve liquidity, particularly for longer-dated securities, where trading remains relatively thin.
The investor base has been identified as the largest gap. Low pension coverage and insurance penetration have restricted demand for longer-term fixed-rate securities, while foreign and retail participation remains modest.
The diagnostic also highlighted fragmentation in financial-market infrastructure and gaps in the legal and tax framework covering areas such as repo, coupon income and collective investment schemes.
Five strategic objectives
The action plan establishes five strategic objectives: strengthening institutional capacity and coordination; making primary issuance more predictable and market-based; developing secondary-market liquidity and private securities-financing repo activity; broadening the investor base; and modernising market infrastructure while removing legal and tax barriers to trading and secured financing.
Steering committee to monitor implementation
The Finance Division will oversee implementation through a single framework.
A Local Currency Bond Market Steering Committee, chaired by the Finance Secretary and comprising senior representatives from the SBP and SECP, will meet at least quarterly. PSX, CDC, NCCPL and the Federal Board of Revenue (FBR) will be invited where relevant.
A DMO-led Technical Group will monitor progress, maintain the action plan, track milestones and report delays to the Steering Committee. The government also plans to publish a detailed implementation roadmap and issue public progress reports every six months through its debt bulletins.
Repo and money-market reforms
The plan calls for periodic assessment of the interaction between SBP liquidity operations and private money markets, including repo activity.
Authorities will consider adopting the Global Master Repurchase Agreement (GMRA) 2011 with country-specific provisions, or revising the domestic master repo agreement and netting arrangements.
The government also intends to identify regulatory, operational, tax and commercial barriers preventing eligible non-bank investors, initially including money market mutual funds, from participating in repo markets.
More predictable government borrowing
The government plans to publish target volume ranges with predefined allocation bands for government securities. Instrument-specific targets will initially focus on shorter maturities before being extended to medium- and long-term debt.
The Finance Ministry and DMO will also seek to reduce delays in announcing auction results and establish a fixed release time. A benchmark policy covering eligible securities, target ranges and liability-management operations is expected to be published by June 2027.
Measures to strengthen secondary-market liquidity
The action plan proposes allowing eligible bank customers to trade exchange-listed government securities through their banks.
The primary dealer framework for FY2027/28 will be reviewed, with greater emphasis on secondary-market and quoting performance through E-Bond. Authorities will also assess the feasibility of a securities-lending facility for primary dealers to support market-making and improve access to scarce securities.
A daily security-level post-trade report covering conventional government securities and Sukuk is planned to improve market transparency.
Foreign and retail participation
The government intends to formalise the DMO’s investor-relations function and re-engage foreign investors, building on Pakistan’s inclusion in the J.P. Morgan GBI-EM Edge Index.
The longer-term objective is to achieve eligibility for major global local-currency government bond indices.
The plan also proposes expanding retail investment channels through InvestPak, digital access via brokers and mutual funds, and government bond exchange-traded funds. National Savings products will also be reviewed, including their operating costs, investment ceilings and interaction with the government securities market.
Financial infrastructure to be modernised
The Finance Ministry will review the wholesale architecture for government securities, including whether a single register for all marketable government securities operated through the SBP could improve efficiency and settlement.
The government also plans to complete the electronic link between the Debt Management and Financial Analysis System (DMFAS) and PRISM+, introduce weekly reconciliation of registers and obtain an independent review of Pakistan’s self-assessment against the Principles for Financial Market Infrastructures (PFMI).
Legal and tax reforms proposed
The action plan proposes statutory provisions to clarify the treatment of repo as collateralised lending and establish rules covering manufactured payments, securities lending and rehypothecation.
The FBR will consider changes to the treatment of coupon and discount income at redemption so that withholding tax applies only to returns accrued during the final holder’s period of ownership.
The government also proposes aligning the tax treatment of government securities held through collective investment schemes with direct investment, alongside measures to strengthen the legal basis for dematerialised holdings, settlement finality and netting legislation.
Three-phase implementation
Implementation will take place in three phases.
Phase I — Foundations: The first 12 months will focus on establishing the Steering Committee and Technical Group, strengthening DMO capacity, improving auction communication and post-trade transparency, facilitating non-bank repo participation and reviewing the primary dealer framework.
Phase II — Principal market reforms: The following 12 months will focus on repo documentation reforms, designing a securities-lending facility, deciding on the future financial-market infrastructure architecture and advancing legal and tax reforms.
Phase III — Deepening participation: Beyond 24 months, the focus will shift towards strengthening institutional demand through pension and insurance reforms, increasing foreign participation and consolidating earlier reforms.
The government said the reforms would be implemented gradually, noting that some measures, including extending debt maturities and maintaining benchmark issuance, could involve short-term costs.
The Finance Ministry will publish progress updates every six months, while the Steering Committee will review implementation and revise the roadmap as market conditions evolve. The plan identifies macroeconomic and fiscal pressures, institutional capacity, inter-agency coordination and market-transition risks among the key implementation challenges.