IMF-linked plan to boost local currency bond market unveiled

ISLAMABAD: On Tuesday, the government unveiled plans to expand the local currency bond market, aiming to enhance compliance under the ongoing International Monetary Fund (IMF) programme that is currently being assessed by a staff mission visiting Pakistan. This development comes shortly after a meeting between Finance Minister Muhammad Aurangzeb and an IMF delegation led by Iva Petrova, where they discussed various sectors including power, privatization, petroleum, tax revenue, and the automobile industry.

Finance Minister Aurangzeb provided the IMF mission with a briefing on the latest economic indicators, credit rating improvements, and the overall investment environment, despite the difficulties posed by the ongoing conflict in Iran. Upon the successful conclusion of these talks, Pakistan would be eligible to receive approximately $1.2 billion in disbursements through two programs: the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) by the end of October or early November.

To meet this obligation, the government announced a strategic plan to develop the Local Currency Bond Market (LCBM) by September 30. The plan outlines reforms necessary for the government, regulators, and market institutions to create a more robust, liquid, and resilient market for both government and corporate securities denominated in Pakistani rupees. This initiative is grounded in a diagnostic study jointly conducted by the IMF and the World Bank, which assessed Pakistan's current bond market.

Currently, commercial banks hold 78% of government securities, while sovereign paper constitutes about 62% of the banking system's assets. This concentration fosters government security auctions but discourages trading, thereby limiting banks' ability to finance the private sector. The study identified that while Pakistan has established some institutional framework for an LCBM, market performance is still more akin to that of a developing market.

The study highlighted uneven progress across six key areas, with the money market and financial infrastructure being the most advanced, while primary-market predictability, secondary-market liquidity, and legal and regulatory frameworks lag behind those in larger emerging economies.

The primary challenge identified was the narrow investor base. Consequently, the government's plan seeks to build a more liquid, transparent, and diversified local currency bond market, aiming to reduce the cost and risk of government financing over the medium term. The strategy includes improving monetary policy transmission and providing a stable benchmark yield curve for private-sector financing.

The five strategic objectives of the plan are: strengthening institutional capacity and coordination, ensuring clear ownership and accountability, making primary issuance more predictable and market-based through a published benchmark policy and medium-term debt strategy, developing a functioning secondary-market liquidity and private securities-financing (repo) market, and broadening the investor base to include institutional, retail, and foreign investors.

Under this plan, eligible bank customers will be permitted to trade exchange-listed government securities through their banks, with oversight from the State Bank, Securities and Exchange Commission of Pakistan, Pakistan Stock Exchange, and the Central Depository Company. The Ministry of Finance and the State Bank of Pakistan will also review the primary dealer framework for the fiscal year 2027-28 to incorporate secondary-market performance metrics, including those derived from E-Bond.

The plan also includes establishing a securities-lending facility for primary dealers, detailing its operational model, eligible securities, risk controls, and fiscal implications.