History of Bond Market in Pakistan

Introduction to tbe Bond Market

ln Lhe early 1990's aklsLan began a ma[or flnanclal reform 1hey began by permlLLlng Lhe esLabllshmenL
of prlvaLe banks ln 1990 Powever Lhe ma[or parL of Lhls reform was Lhe new aucLlonlng of governmenL
securlLles ln Lhe form of 6monLh bllls and bonds wlLh maLurlLles of 310 years
uebL and uebL llke securlLles comprlse Lhe bond MarkeL of aklsLan 1hese securlLles are lssued by Lhree
enLlLles llsLed below along wlLh Lhe percenLages of domlnance
1 1he aklsLanl CovernmenL 98
2 SLaLuLory CorporaLlons 132
3 CorporaLe LnLlLles 079
As of !une 2003 Lhe slze of Lhe bond markeL was aL Lhe equlvalenL of $33 8llllon uS uollars
ypes of Debt Securities Issued
As sLaLed above Lhe largesL porLlon of Lhese debL securlLles are lssued by Lhe aklsLanl CovernmenL and
for Lhe mosL parL Lhey lssue Lhese securlLles ln Lwo forms
O ShorL 1erm CovernmenL of aklsLan 1reasury 8llls (M18s)
1 Zero Coupon 8onds sold aL dlscounL Lo Lhelr face value
2 lssued ln 1enures of 3 6 or 12 monLh maLurlLy daLes
3 Can be Lraded freely Lhrough Lhe counLrles secondary markeL
4 roflL on Lhe bonds ls Laxable aL 20
3 As of !une 2003 Lhe ouLsLandlng amounL of M18s was measured aL $8901 8llllon uS uollars

O aklsLan lnvesLmenL 8onds (l8)
1 lssued ln 3 dlfferenL Lenures 3 3 10 13 or 20 years
2 aymenL of proflL on semlannual basls and ls Laxable aL 10
3 As of !une 2003 Lhe ouLsLandlng amounL of l8s was measure aL $394 8llllon uS uollars

uction of Securities
1he SLaLe 8ank of aklsLan (S8) ls Lhe enLlLy LhaL handles Lhe aucLlon or sales of Lhe bonds on behalf of
Lhe governmenL 1hey are sold Lhrough eleven dlfferenL approved prlmary dealers
O 1he M18s are sold on a flxed forLnlghLly schedule
O 1he l8s are sold on a quarLerly basls

1he slow growLh of Lhe sLock markeL relaLes Lo evenLs ln 1970s when masslve naLlonallzaLlon led Lo a
negaLlve effecL on sLock markeL performance uurlng Lhe nexL Lwo decades Lhe markeL was funcLlonlng
wlLhouL any regulaLory sLrucLure and had very poor dlvldend records lndlvlduals or a group of famllles
reLalned mosL of Lhe equlLy 1he lnvesLors had evldence of lnslder Lradlng and markeL manlpulaLlons
Some regulaLory measures were also puL ln effecL ln 1991 Lo lmprove Lhe effecLlveness of Lhe sLock
markeL and Lo have a beLLer monlLorlng sysLem 1he governmenL esLabllshed an aucLlon markeL for
shorLLerm 1reasury bllls and longLerm federal lnvesLmenL bonds 1he secondary markeL for governmenL
securlLles was also esLabllshed 1he SecurlLles ueparLmenL wlLhln Lhe S8 was seL up Lo
1able 1 CaplLal MarkeL uevelopmenL ln aklsLan (19922002)
?ear 1992 1993 1994 1993 1996 1997 1998 1999 2000 2001 2002
no of new
companles
llsLed
178 110 112 133 90 36 6 2 3 12 9
lund
moblllzed (8y
new
companles
8lll 8s)
239 133 133 397 324 193 138 66 209 692 263
1oLal Lurnover
of share
221 33 792 110 212 387 673 384 343
MarkeL
caplLallzaLlon
(8y ordlnary
shares 8lll 8s)
2184 2144 4046 2933 3632 4691 2393 2892 3919 3394 4280
MarkeL
caplLallzaLlon
(percenL
change)
219 (18) 887 (273) 243 284 (447) 113 333 (134) 262

lmplemenL debL managemenL reforms 1he flrsL credlL raLlng agency was esLabllshed ln 1994 and a
second one ln 1997 1he CenLral ueposlLory Company (CuC) was formed ln 1994 Lo faclllLaLe Lhe
auLomaLed sLock Lradlng sysLem A CaplLal MarkeL uevelopmenL rogram (CMu) was formulaLed ln
1997 Lo sLrengLhen caplLal markeL acLlvlLles lurLher Lhe SecurlLles and Lxchange Commlsslon was
esLabllshed Lo supervlse acLlvlLles of Lhls markeL 1he sLock markeL reacLed poslLlvely Lo Lhese pollcles
and began Lo aLLracL domesLlc and forelgn caplLal 1he karachl SLock Lxchange lndex reached a peak
around 1300
ln 1998 Lhere were Lhree sLock exchanges ln karachl Lahore and lslamabad 1he kSL ls Lhe oldesL
esLabllshed ln 1948 and accounLs for Lhe bulk of Lhe counLry's Lradlng As sLaLed earller Lhe 199193
perlod saw a ma[or lncrease ln Lradlng aL all Lhree sLock markeLs MarkeL caplLallzaLlon aL kSL alone
lncreased from 8s 38 bllllon ln 198788 Lo 8s 200 bllllon ln 199192 Slmllar Lrends were noLlced aL Lhe
oLher Lwo markeLs ln Lahore and lslamabad 1hls paLLern conLlnued buL was broken by downLurns
malnly due Lo pollLlcal lnsLablllLy and economlc crlses Powever sLock markeL Lradlng has shown Lhe
hlghesL performance durlng Lhe flrsL years of Lhls cenLury Cne of Lhe domesLlc markeLs karachl SLock
Lxchange ls raLed as Lhe besL performlng sLock markeL ln Lhe reglon
Developing a Bond Market: Issues and Cballenges
1here are several lssues LhaL need Lo be addressed Lo dlscuss Lhe developmenL of bond markeL ln an
emerglng economy Some of Lhese lssues are general ln naLure buL are more relaLed Lo overall
macroeconomlc condlLlons and economlc pollcles ln pracLlce 1he second seL of lssues ls mlcro aspecLs
of Lhe markeL developmenL and closely looks lnLo Lhe prevalllng economlc envlronmenL and markeL
condlLlons
Macroeconomic Issues
1he seL of macroeconomlc condlLlons lnclude flscal dlsclpllne moneLary condlLlons cholce of exchange
raLe reglme as well as overall flnanclal secLor developmenL lL seems Lo be unreallsLlc Lo plan pollcles for
bond markeL developmenL wlLhouL esLabllshlng cerLaln norms of macroeconomlc sLablllLy and flnanclal
secLor reforms WlLhln Lhese macroeconomlc condlLlons flscal dlsclpllne Lakes Lhe flrsL preference
Lconomlc Lheory suggesLs LhaL hlgh level of flscal deflclLs wlll lncrease lnLeresL raLes 1hese deflclLs wlll
also lncrease Lhe rlsk of defaulL and Lhe cosL of governmenL debL Lhus maklng lL dlfflculL Lo develop a
llquld nomlnal bond markeL ln order Lo reduce markeL uncerLalnLy Lhe governmenL musL ensure a flscal
dlsclple MoneLary sLablllLy ls anoLher lmporLanL prerequlslLe Plgh flscal deflclLs flnanced Lhrough
cenLral bank leads Lo hlgh lnflaLlon and hlgh lnflaLlonary expecLaLlons Plgh lnflaLlon and large flscal
deflclLs dlscourage Lhe longLerm lnvesLmenL pro[ecLs needed for a susLalnable developmenL

Spread beLween expecLed and reallzed lnflaLlon dlscourage lnvesLors lncreased cosL of funds and Lhus
affecLs markeL efflclency Credlble commlLmenL on Lhe parL of cenLral bank Lo conLaln lnflaLlon helps Lo
reduce such uncerLalnLles 1hlrd prerequlslLe ls Lhe exchange raLe sLablllLy Lxchange raLe and caplLal
accounL pollcles lmpacL governmenL bond yleld and lncrease exchange raLe and defaulL premlums 1he
cenLral bank and Lhe moneLary auLhorlLy should be careful ln deslgnlng and lmplemenLlng exchange raLe
and caplLal accounL pollcles lor lnsLance Loo many resLrlcLlons on caplLal accounL wlll be caLegorlzed as
flnanclal represslon whlle no resLrlcLlons could expose Lhe economy
Micro Issues
MarkeL developmenL for domesLlc bonds faces a varleLy of challenges AL Lhe lnlLlal sLage Lhe flrsL and
mosL lmporLanL problem ln developlng a bond markeL ls bulldlng markeL parLlclpanLs Lmerglng
economles face numerous problems ln bulldlng markeL parLlclpanLs such as lack of lncenLlves for lssuers
sLrlcL regulaLory sLrucLure absence of a dlverslfled porLfollo lack of sufflclenL flnances for dealers and
Lhe absence of a hedge markeL and lnsLrumenLs 1he experlence of some early reformers shows LhaL a
balanced regulaLory sLrucLure wlLhouL sacrlflclng prudenLlal sLandards and removal of unnecessary
lnformaLlon dlsclosure would help Lhe developmenL of a bond markeL 1he new regulaLory sLrucLure
should also address Lhe needs of a derlvaLlve markeL for securlLles CorporaLe governance and
esLabllshmenL of lnLernaLlonal sLandards for besL pracLlces ls equally lmporLanL AL Lhe same Llme sLeps
should be Laken Lo esLabllsh credlL raLlng agency (les) LhaL would help lssuers Lo undersLand Lhe rlsk of
lnvesLmenL ln a varleLy of lnvesLlble opLlons as well as dlverslfy rlsk LfforLs should be made Lhrough
courses and advlsory servlces where markeL parLlclpanLs can fully undersLand Lhe rlskreLurn Lradeoff
1hese measures would provlde lncenLlves Lo markeL parLlclpanL and are expecLed Lo lnlLlaLe some
Lradlng acLlvlLles
1he problems faced aL Lhe lnLermedlaLe level lnclude Lhe presence of heslLanL lnvesLors sLaLuLory
requlremenLs resLrlcLlng lnsLlLuLlons Lo buy governmenL bonds Loo rlskaverse aLLlLude of lnvesLors lack
Lo lncenLlves Lo buy corporaLe bonds weak dlsLrlbuLlon channels hlgh caplLal requlremenLs lmbalance
compeLlLlve markeL lack of necessary skllls and experlence Lo aLLracL lssuers and lnvesLors eLc AL Lhls
level pollcles should be focused Lo develop a mechanlsm Lo provlde lncenLlves for Lradlng securlLles
encourage new prlvaLe secLor enLlLles Lo lnvolve ln securlLles Lradlng and lmplemenL regulaLory changes
lncludlng mlnlmum caplLal requlremenLs conslsLenL wlLh lnLernaLlonal sLandards
1he second lssue ln Lhe developmenL of a domesLlc bond markeL ls Lhe lack of commlLmenL on Lhe parL
of Lhe governmenL 1he exlsLence of mulLlple regulaLory auLhorlLles as well as a lack of coordlnaLlon
among Lhem hlnders Lhe developmenL of a bond markeL 1he mosL efflclenL way ls Lo have one slngle
auLhorlLy LhaL would creaLe a balance ln regulaLory sLrucLure and would have a beLLer coordlnaLlon
beLween markeL parLlclpanLs and pollcy makers AnoLher relaLed lssue ls Lhe unsLable macroeconomlc
envlronmenL whlch creaLes uncerLalnLles among lnvesLors 1hls ls probably a Lough call and would
requlre a seL of measures of lnLernal economlc managemenL wlLhouL whlch any acLlvlLy of medlum Lo
longLem lnvesLmenL would noL Lake place ollcles should also be lmplemenLed for a sysLem of non
dlsLorLlonary LaxaLlon sysLem Lo encourage markeL growLh and promoLe markeL parLlclpanLs 8anklng
secLor developmenL Lakes a cenLral role A weak banklng sysLem cannoL supporL Lhe corporaLe bond
markeL AL Lhe same Llme a domlnanL banklng sysLem hlnders Lhe developmenL of corporaLe bond
markeL llnally Lhese emerglng economles should also esLabllsh some pollcles for developlng a markeL
for governmenL bonds 1he problem faced by even some early reformers ls Lhe lack of aucLlon schedule
markeL prlclng mechanlsm and yleld curve MarkeLs llke Slngapore had no secondary markeL for
governmenL bonds unLll recenLly 1hls makes lL dlfflculL for lssue holder Lo deLermlne Lhe proflLablllLy of
Lhe lssue ln some emerglng economles lnLeresL raLes are lnfluenced Lo conLrol debL flnance cosLs
Stages of Bond Market Development
1he developmenL of a bond markeL ln a counLry may Lake Lhree sLages AL Lhe lnlLlal sLage (SLage l) Lhe
markeL does noL have a slzeable savlng and lnvesLmenL opporLunlLles avallable Lhe lnLermedlarles lack
Lhe skllls and experlence banks are wlLher weak or so domlnanL LhaL oLher markeL players are noL
encouraged Lo enLer and Lhe caplLal markeL ls underdeveloped Also common slgns of Lhls lnlLlal sLage
are Lhe absence of macroeconomlc sLablllLy flnanclal fraglllLy and a wellsLrucLured regulaLory sysLem As
such Lhe governmenL and Lhe pollcy makers need Lo esLabllsh Lhe baslc norms for a bond markeL Lo
funcLlon ln Lhe mosL efflclenL manner 1he pollcles of flnanclal llberallzaLlon should be comblned wlLh
deregulaLlon markeL deLermlned prlclng mechanlsm macroeconomlc sLablllLy cenLral bank reforms
lncenLlve mechanlsm for markeL parLlclpanLs and banklng secLor reforms AL Lhe same Llme Lhe counLry
should lnlLlaLe measures needed for Lhe creaLlon of a money and caplLal markeL
AL SLage ll a counLry seems Lo have aLLracLlve lssuers buL llmlLed lnvesLor base developlng caplLal
markeLs and flnally good macroeconomlc and pollLlcal envlronmenL AL Lhls sLage furLher measures
should be Laken Lo develop a prlmary markeL of publlc and prlvaLe securlLles CounLry would also need
publlc company dlsclosure regulaLlons credlL raLlng agency and C1C arrangemenLs Lo supporL Lradlng
llnally Lhe counLry should have a 8enchmark for prlclng long maLurlLles
llnally aL SLage lll a counLry musL have sufflclenL lssuers and lnvesLors skllled lnLermedlarles favorable
macroeconomlc and pollLlcal envlronmenL AL Lhls sLage Lhe counLry should develop a secondary
markeL for securlLles 1hls wlll help prlclng new lssues CredlL raLlng agency musL be able Lo handle a
large number of lssues ulsclosure rules have Lo be sLrengLhened 1ralnlng of lndlvlduals lnvolved ls
lmporLanL Lo clearly undersLand Lhe markeL rlsk Lhe reward besL pracLlces and oLher relaLed lssues
be Role of Social and Institutional Factors
1he dlscusslon ln SecLlon 2 shows LhaL many early reformers ln Asla have been able Lo develop a
reasonable markeL for domesLlc bonds boLh governmenL and corporaLe Powever many emerglng
economles made a slow progress ln SecLlon 3 we elaboraLe cerLaln prerequlslLes for Lhe developmenL
of domesLlc bond markeL and observe LhaL agaln emerglng economles ln Asla do noL saLlsfy some of
Lhese precondlLlons ln Lhls secLlon we analyze Lhe same lssue uslng a dlfferenL perspecLlve Pere we
compare Lhe sLaLe of varlous lnsLlLuLlonal developmenLs and soclal norms LhaL exlsL ln our sample of
counLry Speclflcally we dlscuss Lhe prospecLs of Lhe developmenL of a markeL for domesLlc bonds ln
aklsLan uslng a seL of soclal and lnsLlLuLlonal facLors
1he flrsL comparlson ls by uslng Lhe CaplLal Access lndex (CAl) developed by 8arLh eL al (2004) and
publlshed by Mllken lnsLlLuLe 1he CAl asslgns scores Lo counLrles around Lhe world based on Lhe ablllLy
of enLrepreneurs wlLhln Lhelr counLry Lo galn access Lo flnanclal caplLal 1hese comparlsons show LhaL
aklsLan does noL have Lhe envlronmenL and lnfrasLrucLure needed Lo have an efflclenL bond markeL
aklsLan scored poorly ln all caLegorles aklsLan ls ranked 74 on Lhe basls of overall CAl lndex as
compared Lo Slngapore (3) Malaysla (16) Chlna (38) and lndla (33) lurLher dlsaggregaLlon of Lhe CAl
suggesLs LhaL aklsLan ls ranked 112 ln Macroeconomlc LnvlronmenL 79 ln Lconomlc lnsLlLuLlons 64 ln
llnanclal and 8anklng lnsLlLuLlons 32 ln 8ond MarkeL 82 ln AlLernaLlve CaplLal and 83 ln lnLernaLlonal
Access aklsLan however ls ranked 13 ln LqulLy markeL beLLer Lhan lndla (20) Malaysla (23) and Chlna
(39) ln general aklsLan's performance ln SouLh Asla ls [usL above 8angladesh







1able 3 MarkeL CaplLallzaLlon

AnoLher comparlson based on a seL of soclal lndlcaLors suggesLs LhaL aklsLan dld noL perform any
beLLer Cn CorrupLlon lndex aklsLan (179) only ranked above 8angladesh (083) wlLhln Lhe reglon Srl
Lanka seems Lo be Lhe leasL corrupL counLry ln Lhe SouLh Aslan reglon aklsLan's record ls noL so good
'for 8lsk of LxproprlaLlon (488) 8ule of Law (304) ConLracL LnforceablllLy (169) 8lsk of ConLracL
8epudlaLlon (487) Lfflclency of !udlclal SysLem (3) and 8ureaucraLlc CuallLy (271) aklsLan however
dld reasonable on lndex of 8esLrlcLlon on ress(378) as compared Lo Chlna (838) and Slngapore (636)3
1he Lhlrd comparlson we presenL here ls Lhe markeL caplLallzaLlon Agaln aklsLan's performance ls noL
promlslng lor lnsLance markeL caplLallzaLlon (as a percenLage of Cu) ln 2003 was recorded aL 42
percenL for aklsLan as compared Lo 70 percenL for lndla 139 percenL for Malaysla and 178 percenL for
Slngapore aklsLan however dld beLLer Lhan Chlna (33) Srl Lanka (23) and 8angladesh (3) Cn a
poslLlve noLe we observe LhaL markeL caplLallzaLlon (as a percenLage of 3 lL ls lmporLanL Lo noLe here
LhaL Lhese comparlsons are based on pre2001 daLa Powever Lhe progress aklsLan has made recenLly
ls noL expecLed Lo have slgnlflcanL relaLlve lmpacL on Lhese ranklngs Cu) more Lhan doubled ln
aklsLan slnce 2003 Speclflcally lL lncreased from 2013 percenL ln 2003 Lo 3017 percenL ln 2004 and
Lhen reached Lo 4148 percenL ln 2003 no oLher counLry ln our sample shows such a remarkable
lmprovemenL Powever markeL caplLallzaLlon by flrms ln exLremely low (49) as compared Lo lndla
(1721) and Malaysla (2013)
llnally we look aL Lhe sLaLus of domesLlc debL securlLles for 20032006 (as of March) perlod ln aklsLan
debL securlLles lncreased from uS$29 bllllon ln 2003 Lo uS$34 bllllon ln 2006 1he same more Lhan
Lrlpled ln Chlna over Lhe same perlod lL lncreased from uS$289 bllllon ln 2003 Lo uS$1013 bllllon ln
2006
All Lhese comparlsons suggesL LhaL aklsLan has a long way Lo go Lo have a reasonably efflclenL bond
markeL Clven a hlsLory of hlgh flscal deflclLs pollcy makers should make lL as Lhe flrsL prlorlLy Lo lessen
Lhe burden of deflclL flnanclng Lhrough cenLral bank
Concluding Remarks
1hls paper lnvesLlgaLes Lhe currenL sLaLus and fuLure prospecLs of domesLlc bond markeL ln aklsLan
unLll recenLly even Lhe counLrles caLegorlzed as newly developed LasLAslan economles wlLh a hlsLory
of sLable economlc envlronmenL and reasonably esLabllshed money and caplLal markeLs had dlfflculLles
ln seLLlng up a markeL for domesLlc bonds 1he relaLlvely more developed markeL ln Asla has made some
progress ln developlng a markeL for domesLlc bonds Powever we observe LhaL Lhe pace of bond
markeL developmenL dld noL follow Lhe pace of overall flnanclal markeL developmenL ln many early
reformers We look lnLo Lhe reasons for a slow developmenL of bond markeL ln SouLh Aslan reglon wlLh
a focus on aklsLan Clven Lhe unsLable macroeconomlc envlronmenL ln aklsLan flnanclal markeL
developmenL lncludlng a markeL for domesLlc bonds are of slgnlflcanL lmporLance We use
macroeconomlc and mlcroeconomlc facLors Lo dlscuss Lhe developmenL of domesLlc bond markeL boLh
ln general and wlLh reference Lo aklsLan
1he llsL of prerequlslLe lndlcaLes LhaL Lhe counLry does noL meeL mosL of Lhe precondlLlons needed Lo
develop an efflclenL bond markeL 1he macroeconomlc uncerLalnLles and lack of compleLe lnformaLlon
makes Lhe declslon maklng process dlfflculL for markeL parLlclpanLs WlLhln mlcroeconomlc perspecLlve
lL ls wellundersLood LhaL Lhe markeL for governmenL bonds helps ln Lhe developmenL of flnanclal
lnfrasLrucLure lmprovemenL ln Lhe efflclency of channels for savlng and lnvesLmenL acLlve and
compeLlLlve role of banks ln Lhe flnanclal lndusLry and bulldlng longLerm flnanclal susLalnablllLy 1he
governmenL could use Lhe domesLlc bond markeL Lo meeL Lhe shorLLerm cash flow needs of Lhe
flnanclal sysLem AL Lhe same Llme Lhe cenLral bank can use Lhese markeLs Lo pursue a LargeLed
moneLary pollcy Powever a good coordlnaLlon beLween Lhe governmenL (mlnlsLry of flnance) and Lhe
moneLary auLhorlLy (Lhe cenLral bank) ls essenLlal Lo reap Lhls beneflL 1hls would also requlre a good
lnformaLlon dlssemlnaLlon sysLem relaLed Lo Lhe money markeL condlLlons and Lhe sLaLe of flscal budgeL
on a regular basls 1he comparlson based on some soclal lndlcaLors and lnsLlLuLlonal facLors shows a
gloomy plcLure of aklsLan noL surprlslngly aklsLan performed poorly ln mosL of Lhese ranklngs even
wlLhln Lhe SouLh Aslan reglon 1hls comparlson shows LhaL aklsLan needs Lo make a good efforL Lo puL
necessary lnfrasLrucLure Lo ensure markeL efflclency
1he dlscusslon and comparlsons ln Lhls paper makes lL very clear LhaL aklsLan has made a reasonable
economlc progress ln Lhe recenL pasL buL sLlll lacks macroeconomlc sLablllLy Clven Lhe hlgh level of flscal
deflclLs lL ls dlfflculL Lo esLabllsh and malnLaln a flscal dlsclpllne 1he hlgh level of flscal deflclLs and
lnLernal and exLernal debL puL enormous pressure on domesLlc economy and makes lL dlfflculL Lo plan
and pursue an lndependenL moneLary and exchange raLe pollcy Cn a poslLlve noLe Lhe SLaLe 8ank of
aklsLan has been en[oylng some auLonomy laLely whlch has mlnlmlzed cenLral bank lnLervenLlon ln Lhe
forelgn exchange markeL 1hls coupled wlLh hlgh level of forelgn reserves (slnce 2001) has provlded
sLablllLy Lo domesLlc currency Clven Lhls cerLalnLy lL ls probably an approprlaLe Llme Lo lnlLlaLe
pollcles for Lhe developmenL of a domesLlc bond markeL We belleve LhaL Lhe analysls presenLed ln Lhls
paper would help Lo deslgn and lmplemenL some pollcles ln Lhls dlrecLlon

References Used for tbe Creation of tbis ssignment
O khalll uzma (2004) 1he uevelopmenL of uebL SecurlLles MarkeL CounLry Lxperlence of
aklsLan 14 March 21 2010
O Pardy C uanlel (2000) 8lddlng 8ehavlor ln 1reasury 8lll AucLlons 13 March 21 2010