There’s no other way to interpret this news, except simply as “the terrorists have won” in the full sense of the word:

Pakistan’s government
has agreed to restore sharia, or Islamic law, in the Swat valley and
neighbouring areas of the country’s northwest as part of a peace deal
with local pro-Taliban fighters.
…

Announcing the decision
to restore sharia, a spokesman for the NWFP government said Asif Ali
Zardari the president, had already agreed in principle to this
concession to the region’s religious conservatives.

“All un-Islamic laws related to the judicial system, those against
the Quran and Sunnah, would be subject to cancellation and considered
null and void,” a NWFP spokesman said in a statement following the
talks.

Officials gave
few details of the kind of sharia they were planning to implement in
the Malakand region, which includes Swat, but said that laws that fail
to comply with Islamic texts would been suspended.

The Pakistani government has also agreed its troops will refrain
from launching offensive operations in Swat as part of the deal.

Note that last bit (my emphasis) – this isn’t just a change of laws on the books, but an outright admission that Pakistan’s government is no longer a governing entity in Swat. The disconnect between the Pakistani gov’t spin and the reality on the ground is made quite stark with the rather sardonic reporting by Al Jazeera:

Unlike regions under tribal
rule in the northwest, where al-Qaeda and Taliban fighters have found
safe havens to launch attacks both in Pakistan and Afghanistan, the
Pakistani government has typically controlled the Swat Valley.

Conservative groups aiming to introduce sharia have been fighting government troops in the region since 2007.

The groups took control there after a 2008 peace deal collapsed within months of being signed.

In what way is Swat different from the northwest tribal regions? It actually looks exactly the same.

As far as the War On Terror / Global Struggle Against Violent Extremism goes, Iraq is increasingly looking like a tactical victory, whereas in Pakistan we have a strategic loss.

Related: further coverage from the BBC. Also, my proposal to rename the War on Terror to WOMBAT is making more and more sense.