Debt loops and baby bonds

Pakistan runs two loops simultaneously, and both are making us poorer. The first is the household loop where inflation spikes, cash transfers top up, households consume through the shock, and the cycle repeats. The second is the sovereign loop, which borrows short, rolls over often, and pays the price in fragility every time global conditions tighten. Both loops are rational responses to their immediate constraints, and neither builds anything.

A potential solution that addresses both at once is a baby bond structured not as welfare, but as domestic long-tenor capital endowment. For the sake of simplicity, we may call it the Pakistan Child Endowment Account or PCEA.

A child born into a poor household in Pakistan typically enters adulthood with near-zero financial assets; this is a social equity problem, as well as a structural one. Households without assets cannot absorb shocks, invest in education, or take productive risk. They remain permanently dependent on periodic relief — worsened by recurring cash transfers — without much change in poverty graduation.

A PCEA can marginally change this cycle. At birth, a child would automatically have their account opened as soon as the birth is formally registered. The state can make a modest deposit, thereby officially initiating the account; the catch here is that the amount may not be withdrawn until the child turns 18.

A financial account at birth could not only keep children from poverty, but also lead to the emergence of a domestic long-duration investor base

Effectively, the amount the government spends on funding this comes back to the government as long-term debt instantaneously, which it can use for infrastructure development. Through this structure, it avoids a rollover risk associated with existing short-term borrowing. This literally becomes a way to extend debt maturities, while also enabling asset accumulation for the country’s youth.

With a financial account already in place, there will be an incentive to add to it, with family members encouraged to contribute voluntarily, thereby resulting in passive long-term capital growth. Through such a structure, we can formalise savings which have remained consistently low and are among the lowest in the region, even among low-to-middle income countries. Most of our structural capital problems can be solved with a better savings rate.

To make the deal even sweeter, the account should be allowed to grow tax-free until the earlier prescribed age. For vulnerable households, the state can even add matching contributions upto a certain threshold, rather than simply disbursing cash to fuel more consumption. As the programme matures, the child-turned-young-adult would have a real starting asset they can use for their education, skills training, or even a micro-enterprise stake.

Furthermore, for non-vulnerable households, tax-free compounding can also crowd-in long-term capital that may have been parked elsewhere, and not contributed to overall savings or investments in the country.

A point to note here is that there shouldn’t be any early cash withdrawal facility. The moment an early withdrawal facility is introduced, the programme will start behaving like a short-duration instrument instead of a long-duration one. Behavioural literature on forced savings is unambiguous, wherein the lock-in is the mechanism. Households that cannot access funds do not factor them into consumption planning. The compounding works precisely because the money is structurally out of reach.

Pakistan’s domestic debt profile has deteriorated on the tenor dimension for years. The International Monetary Fund’s First Review under the current Extended Fund Facility explicitly flags rollover risks and emphasises the need to lengthen average time to maturity to improve debt dynamics. The problem is circular; the market won’t buy a long tenor bond in volume because there are no natural long-duration buyers at scale, and because there are no buyers, the government keeps issuing short ones, and rollover pressure continues to compound.

In this instance, a PCEA can solve the problem of long-term capital, as pooled funds can be directly invested in long-term infrastructure, such as bonds or Sukuks, thereby raising long-term capital to fund infrastructure projects with long tails. Instead of making way to a larger debt pool, such bonds can be designated to long-term infrastructure projects, for which we are always scrambling for funds.

The development of a sovereign infrastructure fund that can deploy this capital in projects with positive economic and social returns can essentially solve both debt loops. Our Public Sector Development Programme (PSDP). allocations are loaded with long-term projects which simply can’t be completed because sufficient long-term capital doesn’t exist.

As such, the pooled funds from the programme can become the anchor investor for long-dated bonds, extending the yield curve and creating a market for more of the same financial products. This also opens potential for executing similar projects through a public-private partnership structure, significantly reducing reliance on the federal budget (funded primarily through short-term debt with high rollover risk) for project funding.

Infrastructure finance in Pakistan suffers a well-documented mismatch as projects are long-lived, but funding is short-lived. A standardised infrastructure bond programme (with appropriate governance rails in place) funded by baby bonds fixes this at the margin, not by replacing commercial finance, but by creating steady, predictable demand for the long end of the curve. That demand signal alone changes the market’s willingness to price long paper.

The critical design safeguard here is how such capital is deployed. Such a programme needs three conditions: a published infrastructure taxonomy defining eligible projects; independent verification of allocation and physical progress; and issuance tied to an approved capital expenditure pipeline.

The plan may seem ambitious, but it is entirely workable. The wins from such an intervention would enable every Pakistani child to enter adulthood with a real financial asset — not a one-time stipend, but 18 years of tax-free compounding anchored by a savings habit.

It also leads to the emergence of a domestic long-duration investor base; the missing institutional buyer that makes 15–20-year bond issuance normal rather than exceptional, directly addressing Pakistan’s rollover vulnerability while also not being hostage to stop-start PSDP rhythms.

The writer is an assistant professor of practice at IBA, member of the Thar Coal Energy Board, and CEO of NCGCL.

Published in Dawn, The Business and Finance Weekly, March 2nd, 2026