Bod Market

SBP Research Bulletin Volume 3, Number 1, 2007

Bond Market Developments in Emerging Markets: Propsects and Challenges for Pakistan
Ahmed M. Khalid•
This paper investigates the development of bond market in emerging economies with a focus on Pakistan. The main objective of this paper is to explore the reasons for a slow development of bond market in emerging economies. To achieve this objective, we first provide a comprehensive survey of the bond market developments in a sample of Asian countries. For comparison purposes, we split the sample into two: (i) the early reformers, and (ii) the hesitant or late reformers. We present a case where bond market developments become an integral part of the financial market development. We also discuss the stages of market developments in a sample of emerging market economies. We compare both sets of countries and then draw lessons for Pakistan. We observe that Pakistan needs to satisfy a set of pre-requisites before some meaningful progress in domestic bond market development is made.

1. Introduction
During the period of early 1980s to mid-1990s, many East-Asian and Southeast Asian countries embarked on policies of financial sector reforms, liberalization, deregulation and financial market developments. By mid-1990s, most of these countries were enjoying the benefits of a liberalized financial market and an open economy. However, until recently, these countries lacked a well-established and well-functioning domestic bond market, especially a secondary market for government bonds. The main question is why the development of bond market so important for emerging economies? Bond market has significant importance in any economy but more so in emerging economy where saving and investment opportunities are limited. As such the question is not ‘why to have a bond market?’ but ‘when to have a bond market?’ The benefits of the development of a market for domestic bonds include both the macroeconomic and microeconomic

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