Fixing bond markets

The plan aims to deepen Pakistan's domestic local currency bond market by allowing public trading of government securities through the stock market. Currently, the market lacks depth and diversification, with banks holding a significant portion of government securities. This dominance by banks limits access to credit for small firms, farmers, and potential homebuyers. The proposed reforms recognize this weakness and suggest various measures to improve the market.

Key components of the reforms include allowing individuals to trade exchange-listed government securities through their banks, increasing secondary-market liquidity, establishing a functioning repo market, and encouraging a broader investor base, including pension funds, insurance companies, mutual funds, and retail investors. The IMF should also push for these reforms.

The government should reduce reliance on commercial bank borrowing, forcing greater reliance on market financing and freeing up banks to lend to productive private activity.

Furthermore, the government could require state-owned enterprises to raise at least one-third of future local currency borrowing through bonds. This would create more issuers, diversify instruments, and expose SOE borrowing to greater market scrutiny. Targeted tax incentives for investors holding local currency bonds issued by SOEs and private companies can also boost demand and encourage longer-term investment.

Transparently priced government securities across maturities can serve as benchmarks for private companies pricing their own debt, potentially reducing the economy's overreliance on bank lending. Ultimately, the success of these reforms should be measured by the number of bonds bought, how actively they trade, market liquidity, and whether businesses have better access to long-term capital.