Markets abhor political instability and power vacuum. After almost four months of turmoil, there are signs that the dust may soon be settling down, paving the way for further economic measures that are required to significantly slow down the economy and reduce the pressure on external accounts. The confidence can be seen in the newly-found cool and calm demeanor of the hitherto-jittery Finance Minister.

On the economic front, the IMF is now officially back in the government’s corner. The new government has had to take a number of painful measures to bring back the Fund, which had been seemingly playing a little more hard-to-get than usual. Now there is a sigh of relief. If all goes well, by next month Pakistan will be able to access nearly $1.2 billion in IMF cash, with the EFF extended until September 2023.

With the Fund back on its side, the government will find it easier to tap fresh financing from multilateral institutions (e.g. World Bank and Asian Development Bank). The latest development will also convince friendly countries to finally drop their deposits on the central bank. Noticing that Pakistan’s external financing requirements for FY23 are slowly falling into place may also calm the country’s bond prices.

Being the first line of defense, the PKR, however, may continue to remain under pressure, as foreign equity inflows are found wanting and foreign debt inflows can barely maintain forex reserve level. The recent IMF statement on staff-level agreement has also suggested that the currency will continue to take the hit as it is imprudent to defend it by burning forex in the market. The government also cannot afford to waste dollars like that; besides, gradually-declining PKR is no more a hot political issue as it used to be.

On the political front, the D-Day for both the PDM government and the PTI opposition is Sunday, July 17, when the by-elections on 20 odd provincial assembly seats are set to take place in Punjab. The by-elections haven’t historically been a strong identifier of which party is going to score big or low in the general elections later on. But this time, in the current unprecedented political and economic environment, the results may serve to cement or change perceptions of political strength of both major parties.

If the PML-N is able to bag most of the seats (which will guarantee that its CM in Punjab remains intact), it will further strengthen the coalition government in Islamabad, thereby reducing the likelihood of early elections before the scheduled expiration date of the legislature in August 2023. But if the PTI is able to come on top in the by-polls(which will help to re-install its CM), the ensuing Islamabad-Lahore friction will provoke heightened instability, making it more likely for an early general election to be held later this year.

It is hard to say which way the political pendulum may swing. On the macro level, the PML-N was previously popular in Punjab, but all those hikes in fuel prices and electricity tariffs as well as the load-shedding woes would have demoralized its supporters. In contrast, Khan’s PTI is hammering the government hard, with a narrative that its base is eagerly lapping up. But eventually what matters is the constituency-level politics, where candidate success is contingent on leveraging clan and community relationships, making credible promises,and most importantly, getting the folks out to vote.

Therefore, it helps a candidate’s by-election campaign if their party is in power. Also, which way the ‘institutional’ winds are blowing also plays a catalyzing role in such polls. In addition, a fresh round of political instability will derail the broad-based macroeconomic stabilization agenda that needs to be implemented over the course of FY23. Based on the above factors (and more), it appears more likely at this stage that the Shehbaz-led government will be able to gain political strength and live out its limited shelf-life. Let’s wait and see if the coming Monday brings with it a semblance of political stability.