Dictator's Central Bank

Intersting article from The Economist;

Last month Hilary Benn, who then headed Britain's Department for International Development (DFID), said that “the UK does not give direct funding to the government of Zimbabwe. All DFID's bilateral funding is channelled through NGOs and UN agencies, much of it programmed jointly with other donors.”

But here lies the rub: providing funds that bypass the government is easier said than done. By Zimbabwean law, all official foreign-currency transactions must go through the central bank. With hyperinflation, a gap of around 10:1 has opened up between the official exchange rate operated by the bank and the true rate reflected in the black market. Were donor agencies fully to comply with this requirement and transact their aid at the official rate, around 90% of the value of their aid would be captured by the central bank, which would be purchasing the aid dollars at around a tenth of their value.

Faced with this dilemma, most donors, including DFID, have negotiated special rates with the central bank—usually around the mid-point between the official rate and the black-market rate, though even this implies that the central bank captures around half of official aid.

But Norway's aid agency has gone even farther. Apparently it feels obliged by its principles of good governance to transact all its aid at the official rate, at times inadvertently handing most of its aid to the central bank. As conventional tax revenues to the finance ministry have dwindled in the face of economic collapse, the central bank has increasingly become the locus of government finance, thanks both to its capture of foreign exchange and its printing of money. It must be the world's only central bank that itself imports tractors.