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Introduction
The bond market in Pakistan is comprised of debt and debt like securities issued by a) the
the size of the Pakistan’s bond market was approximately Rs. 1,892 billion equivalent to
USD 33billion. The bond market is clearly dominated by the Government, which
accounted for Rs.1,852 billion (or 98%) of total bonds outstanding as of June 30 th, 2003
followed by corporate entities Rs. 25 billion (1.32%) and statutory bodies Rs.15billion
(0.79%).
The following table shows the outstanding position of bond market during the period
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Floating Debt 516,268 421,742
Un funded Debt 908,215 252,902
Corporate Debt 25,000 431.03 1,000 17.241
Statutory Corporation 15,000 258.62 13,400 231.03
The secondary market trading volume in the Government bond market as measured by
debt.
The Government of Pakistan has run large fiscal deficits over the last two decades. This
has lead to the accumulation of a large domestic debt of Rs. 1,852 billion as at end June,
2003. Of this amount, permanent debt accounted for Rs. 427.908 bn (23 %), floating debt
for Rs. 516.268 bn (28%) and un funded debt (the various saving schemes) for Rs.
908.215 bn.(49%)
The large portion of floating and permanent debt has been raised through the auctions of
short term Government of Pakistan Market Treasury Bills (MTBs) and long term
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• Issued in three tenors of 3-month, 6-month and 12-months maturity
As at end June 2003, outstanding amount in MTBs was Rs 516.268 bn (USD 8.901bn)
including MTBs created for replenishment of Govt. cash balances with SBP.
After the suspension of auctions of the long term Federal Investment Bonds (FIBs) in
June 1998, there was no long term marketable government security that could meet the
investment needs of institutional investors. Therefore, in order to develop the longer end
of the Government debt market for creating a benchmark yield curve and to boost the
corporate debt market, the Government decided to launch Pakistan Investment Bonds in
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• Purchased by individuals, institutions and corporate bodies including banks
Finance
As at end June, 2003 outstanding amount under PIB was Rs. 228.665 bn. Equivalent to
Auction Mechanism
SBP is acting as an agent on behalf of the government for raising short term and long
term funds from the market. The MTBs and PIBs are sold by SBP to eleven approved
The Auction for MTBs is held under a fixed schedule on fortnightly basis.
The Auction for PIB is held on quarterly basis. Since September 2003, the sale of
PIBs is done under Jumbo issuance mechanism under which the previous issues
Pakistan’s bond market has seen increased corporate issuances following the
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scheme to raise funds from non banks sources) in FY00. In addition to this, Government
has also barred institutional investors from investment in National Saving Schemes in
March 2000, which has substantially benefited the corporate debt market.
As a result of these measures, 48 new issues were launch during FY01 to FY03 whereas
The size of Corporate bond market as at end June, 2003 was approximately Rs. 25bn
The Pakistan Credit Rating Agency (PACRA) was established prior to the first public
issue of Term Finance Certificate (TFCs). This agency was incorporated in August 1994
by IFC in collaboration with Fitch-IBCA Inc of UK and Lahore Stock Exchange, while
the second credit rating agency DCR-VIS Credit rating Co. Ltd was set up in 1997 to
• As a prerequisite for launching long term bonds, Primary Dealer System was
introduced in FY00 and seven banks were chosen by SBP on the basis of their
capital adequacy. Based on the experience with the Primary Dealers the Primary
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Dealers rules were revised in FY03 in which the minimum paid up capital
PIBs.
• Non competitive bidding upto 10% of the target amount in PIB was introduced in
FY03 in order to diversify the investor base and encourage participation from
retail investors.
• With the view to enhance secondary market liquidity in long term bond market,
Jumbo issuance mechanism for the sale of PIB was introduced in September
2003. This step is expected to lessen the segregation in Government bond market
arising out of too many issues of different sizes and coupon rates trading in the
market. Also the announcement of quarterly sale target, helps market participants
• In January 2004, PIBs of 15-year and 20-year maturity were introduced to provide
long term yield curve for corporate sector, housing finance and infrastructure
projects.
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Corporate Bond Market
• In order to develop the corporate bond market, several initiatives have been taken
Saving Schemes (NSS) been linked with the yields on market based instrument
• In addition, the Govt. has also barred institutional investors from investment in
NSS in March 2000, which has substantially benefited the corporate debt market.
• On the investment side, commercial and investment banks are main investors in
private sector TFC’s. In 1997, listed TFC’s became “ approved securities” for the
promulgation of the ordinance, the minimum requirement was 50% while in 1997
• The investment cap was raised for provident funds to invest in stocks and listed
• Furthermore the Government has reduced stamp duties and taxation including
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Implementation of Monetary Policy.
The financial sector reforms initiated in late 1980’s started to reform the financial
markets rapidly from FY91. One of the objectives of these reforms was the reorientation
of Monetary Policy away from direct controls towards indirect controls through market-
based instruments. This reorientation triggered two important changes. First is the
increasing assertiveness of the SBP in initiating and implementing its monetary policy,
albeit within the framework of Annual Credit Plans, and second is the significant
With respect to the monetary transmission mechanism, prior to reforms it was largely
determined by the instruments of direct control such as high SLR, bank-by-bank credit
controls and directed lending. After the initiation of reforms following indirect instrument
After the abolishment of Credit to Deposit ratio in 1995, OMOs are being used as a major
tool for the conduct of Monetary Policy. Regular OMOs are being conducted since
January 1995. Effective from July, 2001 OMOs are conducted under a flexible schedule
on as and when required by market conditions prior to that OMOs were conducted under
a fixed schedule. The Government Market Treasury Bills created for replenishment of
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SBP 3-day Repo Facility
The 3-day Repo facility is one of the main instrument of SBP. Changes in it shows the
direction and stance of monetary policy. Cash accommodation is usually provided for
SBP upto 5% of their demand and time liabilities. Effective from July 26, 1997 banks
Swap Desk
The Foreign Exchange Swap Desk was established in September 2001 to manage the
The SBP is managing the public debt on behalf of the Government. There exists a close
coordination between Ministry of Finance and SBP as a result of which fiscal and
monetary policy are closely coordinated to achieve the objective of high sustainable
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growth rate and low and stable inflation rate. To achieve this task the National Credit
Consultative Council meet annually to formulate the Credit Plan for the year which is
This is obviously the most critical area for improving the efficiency of secondary market.
In this respect the Primary Dealers have to play a more effective role in enhancing their
In addition to reduce fragmentation in the long term bond market, Jumbo issuance
issues are reopened to provide greater liquidity to the market. Further efforts are
Presently, in the long term bonds are largely held by the banking system. As on April 30,
2004 banks held 59.65% of total outstanding PIBs whereas Non-banks held 40.35%. The
high percentage of holdings by banks is exposing them to interest rate risk as their
liabilities are short term whereas assets are long term. To help diversify the investor base
SBP is maintaining close liaison with banks and recently guidelines on Risk Management
are issued so as to guide the banking system in their efforts to develop effective Risk
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management system. In addition to encourage retail participation in long term bonds,
non-competitive bidding upto 10% of the target amount was introduced in 2003.
One of the problems in long term bond market is that most institutional investors appear
to lack proper professional skills and infrastructure to gauge market sentiments. This
makes it difficult for institutional investors to quote prices and thus most of them have
adopted a buy and hold strategy. In this respect SBP has held several joint meetings with
Primary Dealers and institutional investors to assess the problems faced by institutional
investors and have encourage Primary Dealers to hold seminars for creating awareness
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