An International Monetary Fund working paper just released says the Reserve Bank of Zimbabwe contributed significantly to soaring inflation in 2006 by pumping huge sums into the economy to fund the operations of the government and state-owned firms.

The paper on "Central Bank Quasi-fiscal Losses and High Inflation in Zimbabwe" said the RBZ's losses on such commitments equaled a 75% of GDP in 2006, unheard of among central bankers who would consider 10% of GDP a worst-case scenario.

Many of the losses arose from providing parastatal enterprises with foreign exchange at below-market prices, said the working paper by Sonia Munoz.

It concluded that "Zimbabwe's failure to address continuing central bank quasi-fiscal losses has interfered with both monetary management and the independence and credibility" of the central bank. Such operations blew out the money supply, obliging the RBZ to soak up liquidity by issuing notes, incurring high interest costs.

The paper said that the Reserve Bank should probably be recapitalized at some point in the future - though not until macroeconomic stability has been restored.

Economist Eric Bloch told reporter Ndimyake Mwakalyelye of VOA's Studio 7 for Zimbabwe that the IMF working paper's findings are correct up to a point – but that the central bank was forced to conduct the operations and has since mended its ways.

More reports from VOA's Studio 7 for Zimbabwe...