What’s new? A neglected banking crisis in Libya is coming to a head just as forces under Field Marshal Khalifa Haftar are trying to capture Tripoli. A protracted conflict will hinder efforts to reunify the divided banking system, fuelling prospects of a financial implosion and economic war alongside the military one.
Why did it happen? The looming crisis is a direct consequence of a four-year split between the Central Bank in Tripoli and its eastern branch, dating from the broader political divide that emerged in 2014. Haftar’s desire to seize control of the Central Bank and state assets possibly contributed to the timing of his offensive.
Why does it matter? Should the Central Bank freeze the operations of two key commercial banks because of falling reserves, the move could destabilise the east-based government and interrupt funding for Haftar-led forces. This would deepen the political divide between competing authorities in east and west and produce severe economic blowback throughout the country.
What should be done? In addition to a ceasefire, Libya’s warring sides should, at a minimum, reach agreement on standardising commercial banking operations in the east and work toward the Central Bank’s reunification. Libya’s foreign partners should offer expert advice and prioritise resolving the financial crisis in negotiations.