(Bloomberg) -- Pakistan’s two main family-controlled political parties are drawing closer to forming a coalition government that would thwart Imran Khan’s group, even after the jailed former cricket star’s candidates won the most seats in the country’s contentious election.

The parties of the Sharif and Bhutto clans “agreed in principle to save the country from political instability,” according to a statement posted on X last night by Pakistan Muslim League-Nawaz President Shehbaz Sharif.

The scenario would be a closing of ranks by Pakistan’s old guard after Khan’s loyalists — running as independents — defied the odds with a strong performance in Thursday’s election, showing the public’s enduring support for Khan and disillusionment with the status quo. It could also lead to more protests and unrest across the country.

The Sharifs’ PML-N and Bilawal Bhutto Zardari’s Pakistan Peoples Party held meetings over the past two days as they seek to form a coalition after the election resulted in another hung parliament. 

Bhutto Zardari’s party said it would consider PML-N’s proposal at a Monday evening meeting of its leadership. Sharif “sought the help” of Bhutto Zardari, the son of assassinated former premier Benazir Bhutto, to form a government, the PPP said in a statement posted on X.

Neither party disclosed the details of the proposal, instead posting videos of members of the two families embracing and holding talks in the sprawling Bhutto Zardari residence in Lahore. 

A coalition of the two political clans could raise tensions after an already contentious election, which saw Khan’s candidates, forced to run as independents, shock observers by winning the most seats but falling short of a majority. 

Any delays in forming a government would weigh on an economy already challenged on several fronts. Inflation is running at 28%, the fastest pace in Asia, and the latest International Monetary Fund bailout program is set to expire in March, suggesting the next leader will have to negotiate a new deal.

“Irregularities and a delay in election results could start a legal battle and this situation can also jeopardize the economic outlook in the short run,” said Adnan Khan, head of international sales at Intermarket Securities Ltd.

Pakistan’s stocks closed 3.1% to the lowest in about seven weeks amid the political uncertainty. Dollar bonds maturing in April dropped by the most since July 2022 before paring losses. 

Imran Khan’s Pakistan Tehreek-e-Insaf party, or PTI, is set to file suits against the Election Commission to attempt to force recounts in some National Assembly seats that it lost. Party supporters have held small protests across cities in Pakistan and blocked a motorway in Peshawar to draw attention to election rigging. 

“What are they going to do, they’re going to put everybody in jail?” asked Humaira Mahmud, 54, an American-Pakistani watching from the sidelines. “We love our army. We love our policemen. We don’t love those handful of generals who are trying to control for their own good. They need to be respectful to their citizens.”

The army has ruled Pakistan directly or behind the scenes for most the country’s modern history but said recently it will no longer be involved in politics. Khan has said the generals conspired with other political parties to oust him from power in April 2022 and was responsible for the crackdown against him and his group, allegations the military have repeatedly denied.

“If the military establishment and the rest of the politicians join hands and refuse the transfer of power then the anger will boil over to the streets,” said Sarwar Bari, an Islamabad-based political analyst. “The majority is with the PTI despite all the odds.”

Caretaker Prime Minister Anwar-ul-Haq Kakar warned that protesters who riot will be dealt with according to the law. “If we stopped people from even protesting, this would send us to fascism,” he said in a televised interview. “But if this peaceful attitude develops into violence and anarchy, no government allows it and neither will we.”

Khan loyalists took at least 95 of the 265 National Assembly seats that were up for grabs, according to PTI leaders. But one Khan-backed candidate who won in the Sharif stronghold of Lahore has already switched sides to join PML-N, and it’s possible others may also change allegiances. 

PTI Chairman Gohar Khan told Geo Television the rest of the independent candidates “are in touch with us and will stay with us only.” He also ruled out forging a alliance with PML-N or the PPP.

“It is better to sit in the opposition than to make a government with them,” he told a Dawn News show.

--With assistance from Betsy Joles, Ismail Dilawar, Faseeh Mangi and Khalid Qayum.

(Updates with comments from caretaker prime minister, closing market prices.)

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