Has Pakistan entered a period of stable instability?

Near-term outlook for the country's political economy has improved, but structural drivers of instability persist.

Pakistan’s political economy entered a long and dangerous period of instability starting in 2022. High inflation, declining reserves, and a growing likelihood of default roiled the economy, while political polarization and institutional challenges led many to fear that the post-2007 system was going to collapse.

Over the last few months, however, things seem to have calmed down on the economic and political fronts:

1. Inflation is down and reserves are up

2. IMF program has been secured

3. Constitutional amendment has been passed

4. A new chief justice has taken office without major hiccups

5. Leadership transition at the ISI has been completed

6. Army continues to back the PML-N government

At its core, this growing stability has set in primarily because 5 key officeholders have been mostly aligned on what needs to be done:

• Chief of Army Staff

• DG of the Inter-Services Intelligence (ISI)

• Prime Minister

• Chief Justice of the Supreme Court

• President

Out of these 5 offices, the top three matter the most, with the military leaders’ backing for the prime minister critical for sustaining the post-election regime.

Given that this regime was brought into power through an electoral process that was neither free nor fair, having the chief justice in your camp mattered as well. This is why Qazi Faez Isa’s tenure as chief justice was critical, and why the regime pushed through the 26th constitutional amendment.

While a new chief justice could create new problems for the regime, some level of safeguards have been pushed through parliament that could limit the true extent of the damage a more independent-minded chief justice could inflict.

At its core, both the military and civilian leadership within the status quo regime realizes that a new wave of instability could stoke even more economic chaos, which is something no one can afford. In fact, part of the logic that I at least pick up on from folks who are loosely part of the ruling regime’s ecosystem is that as the economy improves, the broader appeal of Mr. Khan and his PTI would come down.

I do not fully buy into that rationale, but it is important to note that they see things this way. This is because if the regime’s logic is what I highlighted above, then by extension they are likely to maintain the existing economic policy stance and also continue to collaborate to keep Mr. Khan and his party at bay.

All of which means that for the time being - at least until the conversation about a potential extension for General Munir begins - Pakistan’s political economy is likely to remain largely stable.

What could cause things to change?

Shuja Nawaz, a mentor who has taught me a lot about how good analysis, always reminded me that we are in the business of scenario planning, not prediction.

So here are 3 scenarios that could lead to instability in the near-term:

1. Supreme court decides to act against the government. There are various ways in which this can play out, but in short, the institutional confrontation would lead to the status quo regime facing a legal setback. Given all the issues with the conduct of the 2024 elections, such a move by the superior judiciary would erode the PML-N’s ability to maintain control of the parliament, giving Mr. Khan and his PTI space to destabilize the military-backed Sharif regime.

2. Sharif falls out of favor with the military. Again, we have been here many, many times before. Foreign policy, national security issues, or a growing belief in the GHQ that the military is being asked to do too much to sustain the status quo can cause a falling out. Given that the government owes its existence to the support of the military, such a falling out could lead to a quick collapse of the government, in much the same way that Khan’s government collapsed once Bajwa had soured. But given how subservient Shahbaz is, I do not think this is a likley scenario for the time being.

3. The PMLN decides it has won the economic battle. We have been here before. Successive governments have decided that macro prudential policies must give way to growth. But since they have not pushed through the structural changes required, higher growth leads to the same problems Pakistan always faces. If the regime goes down this path again, both political and economic instability will return quickly, primarily because the IMF and other creditors would stop providing the funding needed to maintain stability. This could cause growing angst in the GHQ and create rifts in the relationship, especially if bilateral creditors express their concern on these developments.

Ultimately, the relationship between 3 men - COAS, DG-ISI, and PM - underpins this period of stability in Pakistan. This is why I refer to it as a period of stable instability.

For the time being, I expect the status quo to persist. But a change in the views and moods of the key actors underpinning the regime in Pakistan could shake things up once more.