The US-led coalition against the Islamic State is squeezing the group's revenues from oil, taxation and financial markets but it needs to step up its campaign of "economic warfare", a leading British official said Tuesday.
Air Vice-Marshal Edward Stringer, who is leading British government efforts to disrupt IS financing alongside international allies, said the jihadist group was showing signs of the pressure on its finances.
But the military chief told parliament's foreign affairs committee: "It's a pseudo-state and we need to think in terms of how you take a state structure apart. So we're involved in economic warfare ."
Experts have noted a recent reduction in the IS group's oil production, largely down to air strikes by the US-led coalition and Russia.
The IHS research group last week said production in IS-controlled territory was down from 33,000 barrels to 21,000 a day since the middle of last year.
It said the group's total revenues had fallen 30 percent from around $80 million (71 million euros) in mid 2015 to $56 million in March 2016.
Stringer said oil still represented around 40 percent of the jihadists' revenue, but noted that it was largely sold within their territory, where there was a captive customer base who could not negotiate on price.
Another 40 percent comes from extortion, taxation and the local cash economy , with the remaining 20 percent from selling antiquities, donations and other sources, according to British government estimates.
These revenues are also under strain from air strikes that have reduced IS territory, and thus its tax base, and which have destroyed stores of cash in northern Iraq worth "hundreds of millions" of dollars, Stringer said.
Stringer said there were signs that the coalition's actions were beginning to take their toll.
"We are starting to see evidence of corruption and embezzlement within the high command, or the senior people within Daesh, and we are starting to see more arbitrary taxation," Stringer said.
But he added: "As we understand exactly how that taxation works, how they run the economy , and how we start to attack those elements which they need to run the war machine and the enterprise -- without killing off the elements of the economy that the local civilians absolutely require to keep life going -- then that's the area we need to look at next."
US pressure on the Iraq government has also forced the Iraqi central bank to tighten up its dollar auctions, amid concerns that IS was using them make money through unregulated exchange houses.
At a previous hearing, the committee heard evidence that the jihadist group had been making $25 million a month through these kind of transactions.
The US Federal Reserve temporarily suspended the delivery of dollars to the Iraq central bank last year amid concerns about the auctions. The bank responded by banning 142 money exchange houses from participating.