ISLAMABAD (AP) — Pakistan's Ministry of Finance on Tuesday unveiled a Strategic Action Plan for the country's local currency bond market, aiming to deepen secondary-market liquidity, broaden the investor base, make government borrowing more predictable and overhaul the legal, tax and market infrastructure governing rupee-denominated securities.
The plan fulfills a commitment under Pakistan's International Monetary Fund-supported program to identify bottlenecks and publish an action plan by the end of September 2026. It is based on a joint IMF-World Bank diagnostic of the money market, primary and secondary government securities markets, investor base, market infrastructure and regulatory framework.
The ministry cautioned that implementation faces risks from renewed inflation, fiscal pressures, limited institutional capacity, coordination challenges and disruptions from liquidity, settlement and tax reforms. It said it plans to mitigate those risks through phased implementation, stronger capacity at the Debt Management Office, cross-institutional oversight, prior market consultation and regular public reporting.
The plan was prepared by the Finance Division's Debt Management Office (DMO) 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). Most reforms are to be carried out over the next two years, though some will extend beyond September 2028.
According to the Finance Division, 91.6 percent of the government's gross borrowing of 34.2 trillion rupees in fiscal 2025 was raised domestically. Banks held about 78 percent of government securities, and sovereign paper made up roughly 62 percent of banking-system assets.
The government acknowledged that this concentration has supported government securities auctions but has also encouraged banks to hold securities rather than trade them, and has limited their capacity and incentive to lend to the private sector.
The plan identifies the narrow investor base as the largest gap in the market. Low pension coverage and insurance penetration have held back demand for longer-duration fixed-rate securities, while foreign and retail participation remains modest.
It sets five objectives: strengthening institutional capacity and coordination; making primary issuance more predictable and market-based; developing secondary-market liquidity and a functioning private repo market; diversifying the investor base; and modernizing market infrastructure while removing legal and tax obstacles.
Oversight
A new steering committee chaired by the finance secretary, with senior SBP and SECP representatives, will oversee implementation. Other bodies, including the PSX, CDC, NCCPL and the Federal Board of Revenue, will take part as needed. A DMO-led technical group will track milestones, prepare progress reports and escalate delays.
A detailed implementation roadmap is due by December 2026 and will be published on the Finance Division's website. The DMO will report publicly on progress every six months through its half-yearly and annual debt bulletins.
Money market and repo
A central priority is developing the private money market and securities-financing infrastructure. The diagnostic found that Pakistan's money market redistributes liquidity but does not yet finance securities positions as it does in larger emerging markets. Banks have increasingly relied on central-bank liquidity to fund their holdings, and repo activity is concentrated around the timing of SBP liquidity operations. The government believes this limits market-making, short selling and the development of derivatives.
The SBP will periodically assess how its liquidity operations affect private money-market development. The plan also calls for adopting the 2011 Global Master Repurchase Agreement with Pakistan-specific provisions, or revising domestic master repo and netting agreements, and obtaining a legal opinion on their enforceability under Pakistani law.
The SECP will identify and address obstacles that keep eligible non-bank investors, starting with money-market mutual funds, out of repo transactions.
The government will also continue reforming the Treasury Single Account, strengthen cash-flow forecasting and assess whether temporary cash surpluses could be invested by the DMO in short-term money-market placements.
Primary issuance
To make issuance more predictable, the government intends to publish target volume ranges with predefined allocation bands, starting with shorter maturities. Bids would be accepted within announced ranges at the market-clearing price, with deviations confined to the published bands.
Authorities also plan to set a fixed release time for auction results by December 2026. A benchmark policy covering eligible securities and target ranges, along with a framework for liability-management operations, is targeted for June 2027.
The DMO will assess investor demand across instruments and maturities, including banks' ability to absorb more fixed-rate duration, and feed the findings into the Medium-Term Debt Strategy, which is updated annually.
Secondary market
Trading is relatively active in securities maturing in up to five years but thins out beyond that. The diagnostic found the primary-dealer framework rewards turnover more clearly than executable quotes. Authorities plan to revise the framework for fiscal 2027-28 to give greater weight to secondary-market performance, including quote performance derived from E-Bond.
The government will also study a securities-lending facility for primary dealers, with an assessment targeted by September 2027 and a launch decision by September 2028.
For transparency, the SBP and PSX are to publish a daily, security-level post-trade report covering conventional government securities and Sukuk. The plan also calls for publishing the methodology behind the Pakistan Revaluation Rates, followed by a review of the yield-curve framework.
Authorities also intend to let eligible bank customers trade exchange-listed government securities through their banks, with implementation targeted by December 2027.
Investor base
The steering committee is to engage authorities on pension and insurance reforms that could increase institutional demand, particularly for longer-dated securities. The SECP's insurance reform programme and the pension reform agenda are to be expedited.
The government also plans to expand retail participation through InvestPak, digital access via brokers and mutual funds, and government bond exchange-traded funds. It will review National Savings products, covering operating costs, investment ceilings and how they interact with the government securities market. An action plan is targeted by December 2026 and adoption by June 2027.
The plan refers to Pakistan's inclusion in the J.P. Morgan GBI-EM Edge Index and sets a longer-term goal of meeting eligibility requirements for major global local-currency government bond indices.
Infrastructure, legal and tax changes
Conventional securities currently settle through PRISM+, while Sukuk use infrastructure involving the PSX, CDC and NCCPL. The government says this split is not standard international practice and can fragment collateral pools, limiting collateral mobility, securities lending, repo and market-making.
The Finance Division will lead a review with the SBP, SECP and PSX of the target architecture. One option is a single register for all marketable government securities operated through the SBP, while preserving broker and exchange access. A decision is targeted by September 2028.
The SBP will separately review whether arrangements allowing eligible non-bank financial institutions to access PRISM+ are efficient and secure. Authorities will also complete an electronic link between the Debt Management and Financial Analysis System and PRISM+, with weekly reconciliation.
On taxes, authorities will seek to apportion coupon and discount income at redemption so withholding tax applies only to the return accrued during the final holder's period of ownership. They also propose aligning the tax treatment of government securities held through collective investment schemes with direct investments, while keeping treatment simple and competitive for non-resident investors. These measures are targeted for the 2028-29 budget.
The Finance Division and SBP will update their fiscal agency agreement and clarify regulatory responsibilities among the Finance Division, SBP and SECP. The legal basis for dematerialized holdings and settlement finality will be assessed and strengthened, and work on netting legislation will continue.
Timeline
Implementation is divided into three phases. The first, covering the first 12 months, focuses on setting up the committee and technical group, adopting the roadmap, strengthening the DMO, improving auction communication and post-trade transparency, facilitating non-bank repo participation and reviewing the primary-dealer framework.
The second, covering 12 to 24 months, focuses on repo documentation, securities-lending design, the infrastructure architecture decision, completion of the DMFAS-PRISM+ link, and legal and tax reforms.
The third, extending beyond 24 months, focuses on institutional demand through pension and insurance reforms, greater foreign participation and progress toward global index eligibility.
Among the earliest deadlines are establishing the steering committee by November 2026, completing the roadmap and setting a fixed auction-results release time by December 2026, updating DMO staffing and career frameworks by February 2027, and publishing the revaluation rate methodology by March 2027.
