Tripoli — A four-year conflict between the Libyan central bank and rival branches is threatening to worsen the battle for the capital Tripoli, with at least 300 people dead and thousands displaced during weeks of fighting.
It is feared the financial crisis will hinder efforts to reunify the divided banking system, fuelling prospects of a financial implosion and economic war alongside the military one.
The looming crisis is a direct consequence of a split between the Central Bank in Tripoli and its eastern branch, dating from the broader political divide that emerged in 2014.
Should the Tripoli-based Central Bank freeze operations of two other key commercial banks because of falling reserves, the move could destabilise the east-based government and interrupt funding for Khalifa Haftar-led forces, which are trying to capture Tripoli.
"This would deepen the political divide between competing authorities in east and west and produce severe economic blowback throughout the country," the International Crisis Group (ICG) warned.
The group said in addition to a ceasefire, Libya's warring sides should reach an 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," ICG recommended.
In April, the Central Bank started enforcing restrictions on several eastern state-owned commercial banks, which cover 30 percent of Libya's commercial banking needs.
Such restrictions loomed prior to Haftar's offensive, which may partly have been inspired by the banking feud.
This, in turn, could prompt Haftar to cut oil exports from areas he controls and ignite an economic war.