The publication on 15 February of a video purporting to depict the execution of 21 Egyptian Coptic Christians by the jihadist group Islamic State in Iraq and Syria (Isis) has proved to be a milestone with significant regional implications in Libya’s chaotic, post-revolutionary conflict.

The establishment of an Isis stronghold in northern Libya poses a major security threat to Europe, which lies just a short boat ride away. It also marks a new front in the fight against Isis for Gulf monarchies including Saudi Arabia and the UAE, which are directly threatened by the group’s transnational ambitions and are currently struggling to contain Isis’ activities in Iraq and Syria by taking part in bombing raids.

For Libya’s immediate neighbours in North Africa, the concerns are even more pressing - with fears Isis could carry out or inspire attacks inside their borders.

Escalating violence

Just as Isis’ lightning-fast advance in Iraq in June 2014 caught the authorities unawares, the speed of the group’s expansion in Libya has surprised even those who are close to the country’s political processes.

Within one month of appearing in the eastern town of Derna, militant groups that have pledged allegiance to Isis have spread west along the north coast, taking over parts of the cities of Benghazi and Sirte, and carrying out a brazen attack on the Corinthia hotel in central Tripoli, killing nine people including five foreigners.

Within two months, they had published the video claiming the mass execution, which in turn prompted revenge attacks by the Egyptian military and triggered a new debate on international intervention in Libya.

“It has been a phenomenal expansion; I don’t think anyone expected that,” says one Libya watcher who recently visited Sirte. “The fact that they pulled off an attack on such a well-defended hotel shows they are well-organised. The heavy militia presence in the city means there are a lot of logistics involved in carrying out operations in Tripoli.”

Counter-attack

Cairo’s response to the slaughter of the Christians was swift. Egypt’s air force targeted the Isis stronghold of Derna the morning after the execution video was released, killing 40-50 people, according to Libyan military sources.

In turn, Isis responded with suicide bomb attacks in the Libyan town of Al-Qubbah three days later, killing dozens of civilians.

The emergence of Isis comes at a dangerous time for the country. On 23 February, Libya’s internationally recognised government, based in the eastern town of Tobruk, released a statement announcing it had decided to pull out of UN-mediated peace talks, delivering a blow to hopes that it would be able to make a deal with the rival government that took control of Tripoli and the surrounding areas in August 2014.

Financial crisis

The worsening political problems are matched by a brewing financial crisis that is threatening to cause the collapse of Libya’s already limited healthcare, education and social welfare institutions.

Increasing violence has disrupted oil production, reducing output to about 400,000 barrels a day (b/d), estimated to be a quarter of pre-revolution levels, when Libya was exporting 1.6 million b/d. At the same time, the price of Brent crude now sits at about $60 a barrel, having fallen by almost 50 per cent from June last year, which is massively shrinking state revenues.

The Washington-based World Bank estimates that if oil prices average $65 a barrel and production remains at current levels, the budget deficit will increase to 31 per cent of GDP in 2015. Foreign currency reserves had shrunk to $100bn by August 2014, down 20 per cent since the start of the year. In January, the World Bank warned that Libya’s reserves could be depleted within four years if the instability continues.

Collapsing institutions

Libya’s private sector has shrivelled since the 2011 revolution, while the public sector wage bill has ballooned by 250 per cent due to efforts by the government to quell unrest and build up the country’s institutions.

Due to the conflict, both the Tobruk government and its rival in Tripoli have been cut off from funding by the central bank, which remains independent from both factions and directly oversees the distribution of salaries to public sector workers, as well as funding the country’s generous subsidy system.

In January, the central bank released a statement calling on all political entities to “cooperate in dealing with the growing crisis and alert the public about the dangers facing the country in order to restore stability and protect Libya’s future”. It has proposed measures to try to slow the rapid decline of the financial reserves, but due to the continuing stand-off between Tripoli and Tobruk, no action has been taken.

Regional concerns

The disintegrating political situation, the spread of Isis and a looming humanitarian disaster means Libya is causing increasing concern beyond its borders. The unfolding crisis was cited by Qatar’s Emir Sheikh Tamim bin Hamad al-Thani in an open letter to US President Barack Obama published in the New York Times on 24 February, in which he said cooperation was needed to “pull the Middle East back from the brink of collapse”.

This sentiment was echoed in another open letter published on 27 February to UK Prime Minister David Cameron from Daniel Kawczynski, chairman of the British parliament’s All Party Group for Libya that called for UK bombing raids against Isis strongholds in the country.

Due to the escalating fighting, both Egypt and Tunisia have been burdened by an influx of people fleeing Libya. In October, the UN reported that a spike in militia violence had driven an estimated 287,000 people from their homes.

Growing exodus

Tens of thousands more have been displaced in the first two months of 2015 and analysts fear the exodus could pick up pace as fears about atrocities committed by Isis increase and state institutions become more dysfunctional.

On top of this, there is the fear that worsening violence in Libya will scare businesses and tourists away from neighbouring countries, such as Algeria, Tunisia and Egypt, all of which are going through precarious political and economic transitions.

William Lawrence, a visiting professor of political science and international affairs at George Washington University in the US, says Algeria and Tunisia are ill-equipped to deal with the fallout from Libya’s worsening crisis. “Algeria can’t easily defend its huge Libyan border, while Tunisia’s army remains weak and is already struggling to deal with militants on its western border and down south,” he says.

Failing talks

Adding to anxiety about the current situation is the international community’s failure to agree on how to tackle Libya’s problems. This is allowing the turf war to escalate unchecked and is buying time for Isis to consolidate its position.

On 18 February, Mohammed al-Dairi, foreign minister in the Tobruk-based government, asked the UN Security Council to remove the arms embargo that was imposed in 2011 during the country’s revolution, in order to help it combat Isis. Russia, Jordan and Egypt both supported a draft resolution that proposed lifting the embargo, but it has been rejected by the US and the UK, which are both permanent members of the Security Council and are calling for a political solution.

“Simply pouring weapons into one faction or the other, which is essentially what has been proposed, is not going to bring us to a resolution to the crisis in Libya,” said British Foreign Secretary Philip Hammond on 19 February.

Embargo disagreement

Britain wants to see a unity government created that includes members of both Libya’s governments before the removal of the embargo is considered, but this kind of deal is a long way from becoming reality. “The UN peace talks are the country’s only chance and so far they’re not succeeding,” says Lawrence.

While talks stall, both governments are looking for new allies to help them increase their influence. On 5 February, Abdurrahman Sewehli from the Tripoli government, was pictured with Ukraine’s Foreign Minister Pavlo Kimkin in Kiev. That same month, Libya’s internationally recognised Prime Minister Abdullah al-Thani travelled to Russia for anti-terror talks.

“Both sides are seeking weapons and the reality is many countries including Russia, Turkey, Egypt and even Ukraine could find ways to sidestep the arms embargo,” says Richard Galustian, a defence analyst based in Libya.

Getting worse

The rise of Isis and the absence of a cohesive strategy to contain Libya’s crisis make it likely the unrest will get significantly worse before it gets better. But some analysts say the entrance of Isis into the picture could actually increase the likelihood of meaningful international intervention and also provide a common enemy for the rival governments. Forces loyal to the Tobruk government are already battling Isis in parts of Benghazi, while the government in Tripoli has deployed more than a thousand fighters around Isis’ base in Sirte and called for it to surrender.

“The fact that Isis has a foothold in Libya may force the likes of the US and Europe to pay more attention to the country’s crisis,” says Lawrence. “Europe and the US need to set out a clear plan of action and pursue it. Syria has shown that conflicts like this can quickly devolve into self-sustaining cycles of violence. They don’t flare up and burn out.”