Libya crisis hikes as Khalifa orders military forces into attacking Tripoli.

Source: Reuters

Eastern Libya commander Khalifa Haftar has thrown much of his military forces into attacking Tripoli, but the outcome of the offensive could be determined by a separate battle — to keep open the parallel finance system that funds his soldiers.

Mobilizing Libya’s biggest military campaign since the 2011 overthrow of Muammar Gaddafi, Haftar has advanced on the U.N.-backed administration in the capital from a bastion in the east, where he has a parallel government and central bank branch.

The general has funded his eastern state with a mix of unofficial bonds, Russia-printed cash and deposits from eastern banks, accumulating debt worth around 35 billion Libyan dinars ($25.18 billion) outside the official banking system.

But diplomats and banking sources say that those sources of support might be closing, as the Tripoli-based central bank, which controls the country’s energy revenues, has taken steps to curtail the operations of banks in the east.

Those banks have in recent months struggled to meet minimum deposit requirements, which could give the Tripoli central bank allied to Tripoli Premier Fayez al-Serraj the excuse to shut off access to hard currency, they said.

“There is a looming banking crisis that could undermine eastern authorities’ ability to fund themselves in the near future,” said Claudia Gazzini, senior Libya analyst at International Crisis Group.

“The crisis was already in the making before the war broke out.”

Haftar has built up his Libyan National Army (LNA) with the help of the United Arab Emirates (UAE) and Egypt supplying heavy gear such helicopters, according to U.N. reports.

But Gulf countries such as the UAE have preferred not to give cash directly to Haftar, fearing it will end up being used for the wrong purposes, several diplomatic sources told Reuters.

That has forced the septuagenarian leader to use merchants to import vehicles and other gear, using hard currency obtained from the Tripoli central bank and paid out by eastern commercial banks issuing letters of credit, military sources said.

There is no public data on the costs of Haftar’s war, but he has sent more than 1,000 troops west plus support staff like drivers or medics, military sources and residents said.

Fuel is not a problem, costing just 0.15 dinars a liter, with state oil firm NOC serving the whole country.

But in its attempt to capture Tripoli the LNA has used hundreds of vehicles, with convoys going west non-stop from Benghazi, carrying anything from soldiers to ammunition to food.

In addition, every day two flights with Russian-made transport planes go from Benghazi to Jufrah in central Libya, his main base. Seriously wounded soldiers are flown to Tunisia.

The offensive has stalled, and so the LNA has vowed to move in yet more troops.

Haftar’s finances face another potential vulnerability.

In November, the House of Representatives allied to Haftar approved a law to set up a military investment authority which gives the LNA control — like in Egypt — of parts of the economy including civilian activities such as scrap metal.

The investment vehicle’s companies are exempted from taxes and import duties, as part of a welfare state envisaged by Haftar, but they need banks to deal with partners abroad and expand their businesses, analysts say.

“If the banks fail, Haftar’s welfare state will come under pressure,” said a Western diplomat.