In mid-February 2008, the political situation in Pakistan remained extremely fluid, and the short-term outlook is unpredictable. The general election seems unlikely to deliver any greater stability to the country as no one party has gained enough support to form a parliamentary majority, thus weakening the authority of the central government in Islamabad and increasing the risk of regionalism as the main political parties focus on their respective provincial support bases. The assassination of Benazir Bhutto has significantly increased the general level of uncertainty and insecurity, largely because she was widely seen as the only viable alternative leader to the beleaguered, and increasingly isolated President Pervez Musharraf. The worsening political situation in the wake of Bhutto's assassination has somewhat deflected the massive criticism from the US, the EU and other allies, that had been instigated by Musharraf's declaration of martial law in late 2007. However, relations between Pakistan and the US have certainly deteriorated and there remains the possibility that, should this deterioration culminate in the delay or cancellation of arms deals, Pakistan would likely turn to alternative suppliers -- such as China. China and Pakistan have a mutual interest in containing India. Moreover, China has already established itself as a substantial supplier of military material (frequently at discount prices) to Pakistan. In any event, Pakistan has for some time had a policy of diversifying its sources of arms. On top of the recent political unrest subsequent to, and following from the assassination of Bhutto, the army is engaged in ongoing combat operations against pro-Taliban militants in the tribal areas adjacent to Afghanistan. NATO's failure to contain a resurgent Taliban and the ongoing surging production of opium have contributed to the scale of Pakistan's problems in this area, and it is assumed that should the situation in Afghanistan continue to deteriorate then this would correspond to further security problems along the border. The Pakistan Army is also fighting local extremists who were angered and alienated by the army's storming of the Lal Masjid (Red Mosque) in July 2007. Furthermore, although it has received relatively little publicity, particularly in the mainstream foreign media, the army is also dealing with a serious insurgency in Baluchistan. At this stage, the deterioration in the overall security has not yet had an observable impact on Pakistan's significant activities as both an importer and exporter of arms. For some time, the armed forces have been in the middle of a major modernisation. Recent developments include the successful test of a Hatf VIII Raad air-launched cruise missile, and the announcement by the air force of a clear preference for the US F-16 over the Saab Gripen. Meanwhile, Pakistan's significant indigenous arms industry has been developing its relationships with customers in South Korea, Turkey, Vietnam and Saudi Arabia. We continue to suggest that there are three key factors to monitor in the coming months. Probably the most important is the quantity of opium that is being produced in Afghanistan. Increased opium production both helps the Taliban to fund its activities and highlights the lack of control of NATO's forces in that country. As mentioned previously, a surge in opium production would be consistent with a worsening of the situation in Afghanistan and thus herald greater challenges for Pakistan's army in its conflicts with militants in the tribal areas of the North West Frontier Province. The second key factor is the progress made by Pakistan in signing procurement deals with suppliers in the US (and other NATO countries) and actually taking delivery.… [ABSTRACT FROM PUBLISHER]