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ISLAMABAD — The regime of Pakistani President Gen. Pervez Musharraf is eager to find a way out of the military standoff with India, knowing full well that a war between the two nuclear-armed neighbors could easily erase the few gains the country has made in the past six months.

Pakistan’s internal security may be challenged by Islamic militants who oppose Musharraf due to his decision to ally Pakistan with the United States in its war on terrorism.

With its foreign-exchange reserves at an all-time high of more than $5 billion — almost five times the level of a year ago — Pakistan’s fortunes appear to be improving in some respects.

Although Pakistan’s economic outlook has been tarnished by a considerable decline in new investments, partly due to growing domestic security problems, it no longer has to worry about the possibility of defaulting on its foreign-debt repayments due to precarious finances. But a war with India would not only impinge heavily upon the country’s coffers, it would also remove some of the goodwill it has earned through its support of the antiterrorism campaign.

Yet even if Musharraf succeeds in negotiating a peaceful settlement to the military standoff in Kashmir, he will still face a number of important challenges in his efforts to consolidate Pakistan’s recent gains.

Islamabad’s relations with the surrounding region, most notably India, Afghanistan and Iran, remain central to its foreign-policy interests. Traditionally, Pakistan has looked to Washington for support and patronage, while describing China — with which it shares a long-established relationship — as a true friend. It is difficult to imagine an immediate improvement in relations with India even if the two sides agree to put an end to their mutual buildup of troops along their border. But it is conceivable that over time, an increased emphasis on closer ties in the region may lead Pakistan’s other neighbors to support an effort by Islamabad to begin resolving differences with New Delhi.

Relations with Afghanistan will remain important as Islamabad keeps a watchful eye on its northern neighbor, hoping for the emergence of a government in Kabul that doesn’t endanger its interests.

While ties with China will remain strong, Pakistan must learn a lesson from the bumpy period the relationship went through in the latter half of the 1990s, when China grew concerned over the activities of Islamic insurgents in China’s Xinjiang Province. Now that Afghanistan’s Taliban regime is gone and Pakistan has distanced itself from the Islamic activists, external support of militancy in Xinjiang will likely wane. Nevertheless, the lesson of the Xinjiang experience remains: Pakistan cannot afford to take any chances with a country that it considers a time-tested friend.

Internally, Pakistan’s political system and the economy need aggressive reforms that can lay the basis for a stable and prospering state. In the country’s 55-year history, frequent interventions by the military in government affairs have damaged the prospects for the creation of stable political institutions. Economic development involving long-term projects run by the private sector, such as the creation of large-scale industries, has simply not taken place. For many investors, the disruptions to civilian rule have meant that little progress has been made toward laying the foundations of policies that offer a sense of continuity.

Finally, the role of the military in internal affairs needs to be redefined. The military’s emergence as a broker during political crises, though offering an important short-term solution, has taken away opportunities for the creation of durable structures. There is no substitute for the long-term stability offered by the establishment of important civilian institutions — namely, political parties, a parliament, a judiciary and a credible civil service. Pakistan’s long-term stability depends upon the building of such vital institutions rather than the military remaining in charge of state affairs.

For now, Musharraf rightly receives credit for not only making the right choice in the wake of last September’s terrorist attacks, but more recently, in continuing to urge India to resume a dialogue rather than embark upon the road to conflict. But once the immediate military crisis is over, Pakistan must confront the challenges that lie ahead.

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