I recently read William Easterly's book, The White Man's Burden (recommended to anyone interested in aid or development). A concept he talks a lot about is the insanity of international financial institutions continuing to grant loans to countries that are clearly bad creditors. A similar thing could be said about agencies that keep giving money to countries who ignore requirements and divert the funds to whatever pet project they happen to like. Of course, the book is arguing that financial (loan-making) institutions should get out of very poor countries that will never repay loans and leave it to the grant-makers, so the situation is slightly different. There is also the problem that not giving money to these countries might result in more people dying, a situation aid donors would like to avoid.
This particular case happens in Malawi. Noway - a fairly important player in the aid environment in Southern Africa - sent Malawi money to buy food (a contribution to the country's food programme). Malawi used some of the money to fund a development scheme for agricultural support. That seems pretty innocuous at first glance but, a) the donor specification of aid purpose is necessary for donor governments to be able to convince citizens to keep giving aid, as well as for transparency and accountability purposes, and b) agricultural support is one of the few things the Malawian government is able to offer the people of this very poor country, so there is a worrying possibility that the results of the investment in 'a development scheme for agricultural support' might be politically motivated. Norway is now demanding that Malawi pay back the 21 million kroner to the Norwegian Ministry of Foreign Affairs. They have said, however, that this situation - moving money to another project - does not constitute fraud or misappropriation of funds and will have no effect on foreign aid cooperation with Malawi.
The question is, at what point does a donor decide that the government is not a trustworthy recipient of their aid funds? This may be a small-ish problem, where no-one really got hurt. Or it could be symptomatic of something larger. Germany recently pulled half its aid from Malawi over a media suppression law. There is discord between the US and Malawi over an energy grant and Malawi's human rights record. Malawi has also said it will not accept conditions on aid that push it to reverse its stance on homosexuality. Of course, the people in Malawi will still need assistance to get food, which remains a problem for donors like Norway. But if the money channelled through government is not being used for food anyway, are there perhaps other ways to get food to the people?