The current macroeconomic framework promotes a private debt financed consumption boom through fresh borrowing at a low policy rate. People have increased consumption by borrowing through commercial banks. They have been buying consumer durable goods for the last couple of years.

This consumption is also supported by a boom in the stock market as the PSX index is hovering around 176,000. The index has jumped around 52% in calendar year 2025.

The increase in stock prices creates a feeling among investors and they perceive themselves as if they are rich. On this basis, they increase consumption. This is an indirect way to increase consumption demand in the economy where rising asset prices play a pivotal role. In the economic jargon, this is known as the wealth effect.

Financial capitalists invest in real estate, stock market and gold. All these fall in the category of financial investments. These investments involve a change of ownership in the secondary market. Considering the current stagnancy of the real estate market, wealthy individuals have also parked their capital in gold in the last couple of years to get quick returns.

Gold prices are at an all-time high of Rs460,000 per tola. The high international prices of gold have made these returns possible for the wealthy investors. In the jargon, these returns are known as capital gains.

Capital gains attract financial investments to a great extent. If capital gains are high, they reduce the acquisition cost of financial assets. The reduction in acquisition cost makes these investments quite attractive for financial investors/capitalists. Furthermore, entry and exit from the financial markets are relatively easy as they are quite organised and orderly.

On the other hand, capital gains increase the replacement cost of real investment. In simple words, it means that new real investment becomes costly. Here, the real investment means investment in equipment, machinery, tools and fixtures, which increases the productive capacity of the economy.

In addition, real investments cannot be recouped easily. For instance, a garment manufacturer cannot exit his business with ease as he has to sell his machines, tools and fixtures and this process takes a considerable period of time. If he sells them, it will depreciate their value. Therefore, capital gains have a depressing effect on real investments.

Financial assets also attract portfolio investments from abroad. Foreign institutional investors chase low-yielding stocks in order to book high capital gains. If shares are valued low at the stock market, these financial investors buy stocks which would re-rate their valuations. This would perpetuate the boom at the stock market.

Capital gains have a positive impact on the financial account of balance of payments (BOP). However, they have a negative impact on the current account balance owing to higher imports, which contribute to current account deficit.

On the one hand, capital gains would increase consumption, which will increase the aggregate demand. On the other hand, capital gains would decrease real investment and turn the current account balance into a deficit by attracting capital inflows from abroad in the form of portfolio investment. This would reduce the aggregate demand.

However, the economy follows a consumption-led regime, where the positive effect of consumption outweighs the negative effects of real investment and capital inflows.

In short, financial investors/capitalists have been calling the shots in this globalised world. High capital gains divert investment away from the real investment. These short-term gains are obtained at the cost of long-term loss, ie, productive capacity. This situation does not bode well for a developing economy where teeming millions are either underemployed or unemployed.

The writer is an independent economist and authored a book: Pakistan’s Structural Economic Problems in the era of Financial Globalisation