Pakistan's Structural Reform in the Local Currency Bond Market: From Managing Rs 34.2 Trillion Borrowing to Rebuilding Market Depth

In mid-September 2026, in a well-lit conference room in Islamabad, a technical team from the Debt Management Office of Pakistan's Ministry of Finance was making last-minute revisions to a draft. Before them lay the Strategic Action Plan for Pakistan's Local Currency Bond Market (LCBM). This document was not merely an institutional calendar for debt management; it marked the fulfilment of a commitment under an International Monetary Fund (IMF)-supported programme. A strategic action plan identifying bottlenecks in the local currency bond market had to be published by the end of September 2026—and that commitment has been met. But when I read the 91.6 percent figure in this document, I was reminded of two years earlier, working on Pakistan's banking sector securities holdings in a Melbourne newsroom. One number became clear to me then: 91.6 percent of the government's gross borrowing comes from domestic sources, the bulk of it held by banks. This concentration is the central problem of today's reform plan.

I began my journalism career after leaving a civil engineering degree, in 2026. That same year I learned that the first symptom of any structural crisis is concentration. In Pakistan's local currency bond market, banks hold around 78 percent of government securities, while sovereign paper accounts for about 62 percent of banking-system assets. These numbers sound safe, but they actually represent a silent gridlock—banks buy securities, then use them to access central bank liquidity, but do not actively trade them. Consequently, the capacity and incentives to extend credit to the private sector shrink. It does not stop there; market depth becomes nearly invisible beyond five-year maturities. Reading the joint IMF-World Bank diagnostic section of this document, I saw they identified exactly this: the primary-dealer framework rewards turnover, but not executable market quotations.

Pakistan's local currency bond market reform plan rests on five pillars. Strengthening institutional capacity and coordination; making primary issuance more predictable and market-based; developing executable secondary-market liquidity and a functioning private repo market; diversifying the investor base; and modernising market infrastructure while removing legal and tax impediments. The most critical of these five is the fourth—the investor base. Why? Because the depth of a market depends not only on the volume of issuance, but on how many different types of buyers are active in it. Pakistan's problem is low pension coverage and limited insurance penetration, so demand for longer-duration fixed-rate securities is weak. Foreign and retail participation also remains modest. This concentration encourages banks to hold securities, not actively trade them.

The most pragmatic aspect of the document is its call for a new LCBM Steering Committee, chaired by the Finance Secretary, with senior representatives from the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP). The Pakistan Stock Exchange (PSX), Central Depository Company (CDC), National Clearing Company of Pakistan Limited (NCCPL) and Federal Board of Revenue (FBR) will participate as relevant. A detailed roadmap must be published by December 2026, and the Debt Management Office will report progress every six months.

However, the most sensitive part of this plan is developing a private repo market. When I analysed pressing data (PPDA) for the Italy-Spain match at Euro 2026 in 2026, I saw that so-called 'possession' can sometimes be a trap. In Pakistan's case, it is the opposite—they redistribute liquidity, but do not finance securities positions. Banks are increasingly relying on central-bank liquidity, while repo activity remains concentrated around the horizons of SBP liquidity operations. This limits market-making, short selling and development of derivatives. The plan calls for adoption of the 2026 Global Master Repurchase Agreement (GMRA) or revision of domestic master repo and netting agreements, with a robust legal opinion on its enforceability under Pakistani law.

To improve primary-market transparency, the government targets a fixed release time for auction results by December 2026. A benchmark policy and transparent liability-management framework is targeted for June 2027. In the secondary market, liquidity beyond five years is nearly absent; therefore, the primary-dealer framework will be revised for FY2027/28 to give greater weight to secondary-market performance and quote performance derived from E-Bond. An assessment of a securities-lending facility is targeted by September 2027, with a design and launch decision by September 2028.

When I read the infrastructure section of this document, it seemed to me that here lies the biggest structural crack. In Pakistan, conventional securities settle through PRISM+, but Sukuk is on the other side of the wall—a separate arrangement involving PSX, CDC and NCCPL. The government itself acknowledged this separation is not standard international practice and fragments collateral pools. Consequently, securities lending, repo and market-making are limited. One option under consideration is a single register for all marketable government securities operated through SBP. A decision is targeted by September 2028.

A quiet but important part of this plan is tax reform. The plan states that by apportioning coupon and discount income at redemption, withholding tax will apply only to the return accrued during the final holder's period of ownership. This is a tangible incentive for investors, as it reduces the tax burden when trading securities. These tax measures are targeted for inclusion in the 2028-29 budget.

I read one sentence in this document repeatedly—'Pakistan's inclusion in the J.P. Morgan GBI-EM Edge Index.' This is a long-term objective, requiring eligibility for major global local-currency government bond indices. Pakistan is still at an early stage. Phase I (first 12 months) is foundations; Phase II (12-24 months) is principal market reforms; Phase III (beyond 24 months) is institutional investor demand and greater foreign participation.

But here I must ask a question—this plan has a clear gap. All the dates, committees and stakeholders are in place, but where is the uncertainty of human behaviour? Why would market participants change overnight? Because the precondition for reform is not just infrastructure, but incentives. A bank will be incentivised to buy long-duration fixed-rate securities if its capital requirements and risk-weighting framework permit it. The plan has no clear change in capital treatment.

I believe Pakistan's bond market reform is a machine-rebuilding project. The repo market, single register, tax amendment—these are so-called 'gateways.' But true depth will come when a retired teacher can park his savings in a government bond ETF, or a small insurance company can buy 10-year bonds to match its liabilities. The plan mentions InvestPak, digital broker access, mutual funds and government bond ETFs; it also mentions a review of the National Savings framework. These are the right paths, but if by December 2028 only paperwork changes and real participation does not increase, then this reform will remain merely an institutional exercise.

I have always believed that data is a mirror, not a promise. The plan published by Pakistan's Ministry of Finance began from the reality of 91.6 percent domestic borrowing. If they can move toward market depth, J.P. Morgan index eligibility will not just be a recognition, but a new stream of liquidity for the macroeconomy. But if implementation fails, then the management of Rs 34.2 trillion in borrowing will simply spin in a cycle of frozen concentration. Time will tell—the plan is a promise, the market is a truth.

(Source: Ministry of Finance Pakistan, Debt Management Office, Strategic Action Plan, September 2026; IMF-World Bank joint diagnostic; data published by the State Bank of Pakistan and SECP.)