MoF unveils action plan for IMF-supported LCBM

ISLAMABAD: The Ministry of Finance (MoF) on Tuesday unveiled a Strategic Action Plan for Pakistan’s Local Currency Bond Market (LCBM) under its International Monetary Fund (IMF)-supported programme pledge to address market bottlenecks, while targeting deeper secondary-market liquidity, a broader investor base, more predictable government borrowing and reforms to the legal, tax and financial-market infrastructure governing rupee-denominated securities.

However, the ministry cautioned that implementation could face risks from renewed inflation, fiscal pressures, institutional capacity constraints, coordination challenges and disruptions from liquidity, settlement and tax reforms.

The plan, prepared by the Finance Division’s Debt Management Office (DMO) 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), sets out reforms to be implemented largely over the next two years, with some measures extending beyond September 2028.

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The government said the plan fulfils its commitment under the IMF-supported programme to identify bottlenecks to the development of the local currency bond market and publish a strategic action plan by the end of September 2026.

The plan is based on a joint IMF-World Bank diagnostic covering the money market, primary and secondary government securities markets, investor base, financial-market infrastructure, and the legal and regulatory framework.

According to the Finance Division, 91.6 percent of the government’s gross borrowing of Rs34.2 trillion in fiscal year 2025 was raised domestically. Banks held around 78 percent of government securities, while sovereign paper accounted for about 62 percent of banking-system assets.

The government acknowledged that while this concentration has supported government securities auctions, it has also encouraged banks to hold securities rather than actively trade them and has constrained their capacity and incentives to extend financing to the private sector.

The plan identifies the narrow investor base as the largest gap in Pakistan’s local currency bond market.

Low pension coverage and insurance penetration have restricted demand for longer-duration fixed-rate securities, while foreign and retail participation remains modest, it said.

The plan sets five broad objectives: 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.

A new LCBM Steering Committee, chaired by the Finance Secretary and comprising senior representatives of the SBP and SECP, will oversee implementation. Other institutions, including the PSX, CDC, NCCPL and Federal Board of Revenue (FBR), will participate as relevant.

A DMO-led technical group will maintain the action plan, track milestones, prepare progress reports and escalate delays to the Steering Committee.

The detailed implementation roadmap is to be prepared by December 2026 and subsequently 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.

One of the plan’s central priorities is to develop 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 in the manner seen in larger emerging markets. Banks have increasingly relied on central-bank liquidity to finance securities holdings, while repo activity remains concentrated around the horizons of SBP liquidity operations. The government believes this limits market-making, short selling and development of derivatives.

The SBP will periodically assess how its liquidity operations interact with private money-market development, including repo.

The plan also calls for adoption of the 2011 Global Master Repurchase Agreement (GMRA) with appropriate Pakistan-specific provisions, or revision of the domestic master repo and netting agreements.

A robust legal opinion is to be obtained on the enforceability of the resulting documentation under Pakistani law.

SECP will identify and address regulatory, operational, tax, documentation and commercial obstacles preventing eligible non-bank investors from participating in repo transactions, initially focusing on money-market mutual funds.

The government will also continue reforms to the Treasury Single Account and strengthen cash-flow forecasting to smooth government cash balances. The authorities will assess whether temporary government cash surpluses could be invested by the DMO through short-term money-market placements.

The government intends to make primary-market issuance more predictable by publishing target volume ranges with predefined allocation bands. Instrument-specific targets will initially be introduced for shorter maturities and expanded as market depth improves.

The plan says bids should be accepted within announced ranges at the market-clearing price, with deviations confined to published allocation bands.

The authorities also intend to reduce the delay in announcing auction results and establish a fixed release time by December 2026.

A benchmark policy covering eligible securities and target ranges, together with a transparent framework for liability-management operations, is targeted for June 2027.

The DMO will also assess investor demand and constraints across instruments and maturities, including banks’ ability to absorb additional fixed-rate duration. The findings will feed into the financing mix and maturity structure of the Medium-Term Debt Strategy (MTDS), which will be updated annually.

The plan identifies weak secondary-market liquidity as another major structural constraint.

While trading is relatively active in securities with maturities of up to five years, liquidity becomes thin beyond that point. The diagnostic found that the existing primary-dealer framework rewards turnover more clearly than executable market quotations.

The authorities therefore plan to revise the primary-dealer framework for FY2027/28 so that secondary-market performance, including quote performance derived from E-Bond, receives greater weight.

The government will also assess the feasibility of a securities-lending facility for primary dealers to improve access to scarce securities and support market-making.

An assessment is targeted by September 2027, with a design and launch decision by September 2028.

To improve transparency, SBP and PSX are to publish a daily, security-level post-trade report covering conventional government securities and Sukuk, with historical data made available for analysis.

The plan also calls for publication of the methodology used for the Pakistan Revaluation Rates (PKRV), followed by a review of the yield-curve framework to determine whether separate methodologies are required for revaluation, market pricing and benchmark purposes.

The authorities also intend to enable eligible bank customers to trade exchange-listed government securities through their banks.

SBP, SECP, PSX and CDC have been assigned responsibility for the measure, with implementation targeted by December 2027.

The move is intended to improve access to government securities and support wider participation beyond traditional institutional investors.

The plan calls for the LCBM Steering Committee to engage relevant authorities on pension and insurance-sector reforms that could expand institutional demand for government securities, particularly longer-duration instruments.

SECP’s insurance-sector reform programme and pension reform agenda are to be expedited, with concrete milestones incorporated into the implementation roadmap.

The government also plans to expand retail participation through channels including InvestPak, digital access through brokers and mutual funds, and government bond exchange-traded funds (ETFs).The National Savings framework will also be reviewed.

The review of Central Directorate of National Savings (CDNS) products will cover operating costs, investment ceilings across product windows and the interaction between National Savings products and the government securities market.

An action plan is targeted by December 2026, with adoption by June 2027 and subsequent implementation. The plan specifically refers to Pakistan’s inclusion in the J.P. Morgan GBI-EM Edge Index, with a longer-term objective of meeting eligibility requirements for major global local-currency government bond indices.

Currently, conventional securities settle through PRISM+, while Sukuk use infrastructure involving the PSX, CDC and NCCPL. The government says this separation is not standard international practice and can fragment collateral pools, limiting collateral mobility, securities lending, repo and market-making as the market develops.

The Finance Division will therefore lead a review with SBP, SECP and PSX of the target wholesale architecture. One option under consideration is a single register for all marketable government securities operated through SBP, while preserving broker and exchange access. A decision is targeted by September 2028.

SBP will separately review whether existing arrangements allowing eligible non-bank financial institutions to access PRISM+ and settlement services are sufficiently efficient and secure. The authorities will also complete the electronic link between the Debt Management and Financial Analysis System (DMFAS) and PRISM+, with weekly reconciliation through exception reporting.

The plan contains a substantial legal and tax reform agenda aimed at reducing obstacles to repo, securities lending and investment through collective investment schemes.

The authorities will also seek to apportion coupon and discount income at redemption so that withholding tax applies only to the return accrued during the final holder’s period of ownership.

Another proposed change is to align the tax treatment of government securities held through collective investment schemes with direct investments, while maintaining simple and competitive treatment for non-resident investors. These tax measures are targeted for inclusion in the 2028-29 budget.

The Finance Division and SBP will also update their fiscal agency agreement and clarify the respective regulatory responsibilities of the Finance Division, SBP and SECP.

The legal basis for dematerialised holdings and settlement finality will be assessed and strengthened where necessary, while efforts will continue to complete netting legislation.

The government has divided implementation into three broad phases.

Phase I — Foundations, covering the first 12 months, will focus on establishing the Steering Committee and technical group, adopting the implementation roadmap, 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, covering 12 to 24 months, will focus on repo documentation, securities-lending facility design, the financial-market infrastructure architecture decision, completion of the DMFAS-PRISM+ link and legal and tax reforms.

Phase III — Deepening participation, extending beyond 24 months, will focus on institutional investor demand through pension and insurance reforms, greater foreign participation and progress towards global index eligibility.

Among the earliest deadlines contained in the plan are: establishment of the LCBM Steering Committee by November 2026, preparation of the detailed implementation roadmap by December 2026, a fixed release time for auction results by December 2026, publication of the PKRV methodology by March 2027, updated DMO staffing and career framework by February 2027, and major market-infrastructure and securities-financing reforms extending through September 2028 and beyond.

The Ministry said that it plans to mitigate risks through phased implementation, stronger DMO capacity, cross-institutional oversight, prior market consultation and regular public reporting.

Copyright Business Recorder, 2026