I've never seen any problem with the "empire allowing balator to exist" because I have always thought it to be a rather quaint lore and addition to the CF story. Balator is full of unique characters, kryldor, jaragh, bladerunner, "that battlerager guy", etc. I've always viewed it as a kind of asterix/obelix village, surviving against the evil empire against all odds and stopping the imperial advance down to Hamsah. Sort of like the thorn that can't be plucked out. So you have a small village, quite against the empire, with unique chars that are strong enough to repel the empire but for various reasons are content to just stay where they are.

just like obelix. whom I love. And wish someone would drop me into the cauldron of magic potion.