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In a normal economy, the currency will weaken in difficult times, but something counterintuitive is happening in North Korea: As the situation gets worse, the won soars.
Kim Jong Un’s country has suffered the harshest sanctions in its history, large-scale flood damage and unprecedented pandemics, which have disrupted most of its trade. Last year, the economy experienced its biggest decline in more than 20 years, and its people are facing one of the worst food shortages in more than 10 years.
But this year, the North Korean won against the U.S. dollar has risen by 25%. This is calculated on a monthly average based on figures reported by two media organizations that track North Korea. Prior to this, there was an increase of 15% in 2020.
There are many conflicting theories as to why this happened, from the border closures of the Kim Jong Il pandemic that stifled demand for foreign currencies to isolated countries cracking down on their use. Whatever the reason, most observers agree that this is not a good thing.
“When a country is in trouble, the currency usually depreciates, but the situation in North Korea is just the opposite,” said Kim Byung Yeon, a professor of economics at Seoul National University. North Korea may be trying to boost the won to support the economy, but continuing such attempts “may eventually further damage the real economy.”
North Korea’s unofficial exchange rate is tracked by two news media and formed in the country’s “jangmadang”. The local market has developed into a large informal economy. In the past ten years, its official exchange rate has been stable at around 100 won per dollar, which is an artificially strong level that cannot be used as an indicator. The unofficial exchange rate is about 5,200 won per US dollar.
North Korean journalist Ishimaru Jiro stated that operating private currency exchanges in North Korea is illegal, so two media companies, Japan’s AsiaNews International and Seoul-based Daily NK, used the secret network of people in this isolated country to compile their exchange rates. . Lee Sang Yong, editor-in-chief of Asia Press International and Daily NK. They get information about currency transactions in jangmadang.
According to Daily NK, the exchange rate has generally stabilized at around 8,000 won per US dollar since the beginning of 2013, but the won began to rise last year and reached a monthly average of 4,723 in August, the highest level since June 2012.
Many observers say that the coronavirus pandemic is the cause of the surge.
In addition to the sanctions already imposed by the United Nations, the United States imposed a comprehensive trade and financial embargo in 2017, but goods are still smuggled from China into North Korea.
But Lin Xiu-ho, a senior researcher at the National Security Strategy Institute, a think tank funded by the Seoul government, said that when North Korea closed its borders in 2020, all this changed.
Until then, “there is still demand for foreign currencies,” Lim said. “As imports to North Korea have plummeted, the demand for foreign currencies is also declining.”
According to data from the Korea International Trade Association, a trade organization based in Seoul, from August 2020 to February this year, imports from North Korea’s largest trading partner, China, fell by more than 90% year-on-year, and continued to decline thereafter. Ramon Pacheco Pardo, a professor of international relations at King’s College London, said satellite images showed that the once busy bridges and roads between North Korea and China became empty after the border was closed.
Kim of Seoul National University said that the decline in imports is not the only reason for the surge. He said that the rise in the Korean won means that foreign currency has also lost its appeal in North Korea, which shows that the government has cracked down on its use.
“Even if imports decline, if the local market still has demand for the U.S. dollar, the Korean won will not appreciate so much,” Kim said.
The Russian Embassy posted on Facebook in October last year that many retail stores in the capital, Pyongyang, have stopped accepting foreigners’ U.S. dollars or prepaid overseas currency cards, instead requiring them to pay in Korean won.
“Daily Korea” quoted an unidentified North Korean person familiar with the matter in April this year as saying that financial authorities are ordering residents to report their foreign currency holdings and deposit them in banks.
Kang Mijin, chief executive of NK Investment Development, a data service company that provides research and information on the North Korean market, said that most North Koreans keep U.S. dollars in the country and use them for commodity transactions. This is especially true because the large-scale currency reform in 2009 reduced the value of their won holdings by more than 90%.
“North Korea may see this period of isolation as an opportunity to restore its socialist system,” said Kim of Seoul National University. “The key for the government to maintain control of the system is to return to the won.”
Kang of NK Investment Development stated that North Korea may try to protect its people from economic hardship by strengthening the won and thereby causing deflation.
There is even a theory that the mysterious North Korean currency broker may be accelerating the rise of the won through speculative trading.
Regardless of the truth, analysts say that the extraordinary surge in the won will not end well.
South Korea’s state-run think tank, the Korea Development Research Institute, said in a report in January that a decline in trade and a strong currency indicate that the economic system has collapsed. It said that North Korea may be facing its worst economic crisis since the 1990s.
Choi Ji-young, a researcher at the National Unification Research Institute in South Korea, said that although currency appreciation may benefit government-backed companies and households that do not hold U.S. dollars, increased volatility is bad for the country as a whole. The government-affiliated research institute wrote in an August paper. She wrote that turbulent markets have increased uncertainty and hindered resource allocation.
Pardo of King’s College London said that for “ordinary North Koreans, this is a warning sign.” “Compared with those who can use the won more freely, the poorest North Koreans have less chance of getting the won and their standard of living may decline.”
Choi Eun-joo, a researcher at the Sejong Research Institute, a private research center in the city south of Seoul, is not pessimistic.
“The Kim regime is more concerned with public sentiment than any other government,” Cui said, noting that official speech since the beginning of the pandemic shows that the government is working hard to prevent this from becoming a social problem.
“But if the current situation lasts for a long time, things may get very bad,” she said.
– With the assistance of Jeong-Ho Lee, Daedo Kim, Alex Sazonov, Marcus Wong and Daniel Ten Kate.
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