THE plan to deepen the domestic local currency bond market by allowing the public to trade government securities through the stock market should help address a weakness long concealed by the sovereign’s easy access to bank borrowings. Pakistan’s large government securities market lacks the depth and diversification needed to allow securities to be widely held, actively traded and efficiently priced. Banks, holding about 78pc of government securities with sovereign paper accounting for roughly 62pc of their assets, have therefore little reason to seek ‘riskier’ private borrowers. Consequently, small firms, farmers and potential homebuyers struggle to obtain credit. The proposed reforms recognise this structural weakness. More predictable and market-based issuance, greater secondary-market liquidity, a functioning repo market and a broader investor base are all necessary. Allowing individuals to trade exchange-listed government securities through their banks should also improve access and price discovery. But can the reforms change how the market works?

That requires breaking the banks’ dominance. Pension funds, insurance companies, mutual funds, retail investors, and eventually, foreign investors must become bigger participants. They need both access and incentives to hold and trade rupee securities. Secondary-market liquidity is equally important. Primary dealers should have incentives to make markets rather than merely participate in government auctions. The proposed review of the primary-dealer framework and securities-lending facility could help. The IMF should push this logic further. The government must borrow less from commercial banks. Reducing bank borrowing would force greater reliance on actual market financing, creating room for banks to lend to productive private activity.

The market should also be broadened beyond government debt. The government could require SOEs to raise at least one-third of all future local currency borrowing through bonds. This would create more issuers, diversify instruments and maturities, and expose SOE borrowing to greater market scrutiny. Demand can be boosted through targeted tax incentives for investors holding local currency bonds issued by SOEs and private companies. Such incentives should encourage longer-term investment. Further, transparently priced government securities across maturities can provide benchmarks against which private companies price their own debt. Over time, this could reduce the economy’s overreliance on bank lending. That said, the government must avoid treating the bond market reform as a way to finance itself more easily. A deeper market should reduce refinancing risks, improve monetary policy transmission and redirect savings to productive investment. The measure of success cannot be the number of bonds issued. It must be who buys them, how actively they trade, how liquid the market becomes and whether businesses have better access to long-term capital.

Published in Dawn, October 1st, 2026