Foreign exchange remains challenging in estranged contexts. With limited trade options, especially when a sanctions regime is in place, the main sources for building foreign exchange reserves are donor funding and diaspora remittances. In a weak regulatory framework, there may be multiple exchange rates, such as in Lebanon or Yemen, and a majority of transactions taking place in the unregulated private sector. Those factors disadvantage donor funds and remittances, which adhere to the official rate set by the central bank. Some form of regulated foreign exchange system driven by market parameters helps create predictability for donors in terms of the conversion rate for their aid.
The $246 million World Bank Emergency Social Safety Net Project in Lebanon, launched in 2020, is an example of this challenge. This project provides some 780,000 individuals with a monthly transfer of $20 per person. The World Bank was initially offered the official rate of LL1,500 per dollar by the Central Bank of Lebanon, while the market rate was around LL15,000. The Bank ultimately bargained for a rate of LL6,240 per dollar. The project was criticized by civil society groups as a bailout of a bankrupt financial system. Those groups recommended instead that transfers be made in dollars.
Where there is a recognized government, the IMF can play a role in helping strengthen financial systems and address issues that affect aid transactions. The IMF Staff-Monitored Programme for South Sudan was key in the creation of a unified market-determined foreign exchange rate in 2021, eliminating what had been a chaotic multiple exchange rate system.
Finally, access to quality economic data is a challenge in environments where authorities are not recognized or are heavily sanctioned. Basic service programming is almost impossible without it. In these situations, maintaining some technical level of exchange with relevant state institutions’ officials does not replace enhanced information-sharing among humanitarian and development partners, but it can help ground macroeconomic analysis and, thereby, more effective programming. Interviews for this paper identified the consistency of IMF engagement as playing an important stabilizing role, gathering data and preventing spillovers, in situations of estrangement between national authorities and donors.
This paper argues that basic services in politically estranged situations should be redefined to include economic livelihoods, utilities and key macroeconomic and financial systems. In most cases, this implies the continued functioning of existing systems, rather than expanded funding.
Staying engaged assumes that ruptured relations are not permanent. Limiting or bypassing government is a partial and temporary solution to meet urgent needs and prevent bad situations from worsening. However, uncertainty as to when opportunities for re-engagement will occur – and how – is a huge challenge for aid programming. Some politically estranged situations (e.g. Eritrea, Zimbabwe) can persist for a decade or more, while others (e.g. suspension of development assistance in Tanzania in 2018) saw the resumption of political and development relations with donors in a relatively short space of time.
This paper argues that regular review and the capacity to adapt programming are critical to staying engaged in politically estranged settings. Adaptive programming should focus on the potential for the political and governance context to improve or further deteriorate, and the scope for accountability between national authorities and people. The end state for political estrangement is the resumption of full political and development relations. Commitment to this goal means being receptive to potential openings towards estranged authorities, through political dialogue and the careful design of humanitarian and development engagement. It may also mean monitoring and adapting approaches based on assessment of likelihood of alternative sources of external assistance for those estranged authorities. International partners should remain willing to explore new approaches over time that support transformative opportunities for an improved and more sustainable end-state. Some approaches will fail, but willingness to try is essential to exit from estrangement.
Addressing these challenges successfully requires collaboration across the humanitarian-development-peace nexus to:
- Build and maintain domestic support for engagement;
- Establish and communicate clear conditions with national actors – i.e. sanctioned authorities and civil society and community groups, including opposition actors that uphold human rights;
- Design delivery modalities and oversight mechanisms that channel aid effectively; and
- Adapt programming rapidly to circumstances.
These four areas are intertwined – how donors secure domestic political support for aid in estranged settings shapes the substance and delivery of aid. How aid delivery and oversight are designed affects the ways in which donors engage with recipients. This, in turn, shapes communication to donor constituencies, as well as the capacity to adapt to often rapidly changing environments.