In a normal country, difficult times for the economy often weigh on currencies. But North Korea is not a normal country, even in that basic rule. In recent months, the country’s historic economic lockdown has caused an unexpected effect that defies all logic: the North Korean won is skyrocketing in value.
The country ruled by dictator Kim Jong Un has been hit by the toughest sanctions in its history, suffered massive flood damage and has become even more self-enclosed by the pandemic, nipping off most of the little trade that it maintained with its only ally, China. The result is that its GDP has suffered its steepest decline in more than two decades, while its population suffers its worst famine so far this century. The result of this series of catastrophes is that its currency, the won, has appreciated 25% against the dollar so far this year, after gaining 15% in 2020, according to data from the two independent South Korean media that report of its exchange rate on the black market.
There are multiple theories as to what is happening. It may be that Kim’s decision to close the border completely destroyed the demand for foreign currency. Or it may be that he passed a law making possession of it a crime. Be that as it may, most observers agree that these moves do not indicate anything good.
“A currency normally depreciates when a country suffers such serious problems, but in North Korea the opposite is true,” said Kim Byung-yeon, an economics professor at Seoul National University. The North may be trying to boost the value of the won to revive its battered economy, but if it continues down that path, “it could end up hurting the real economy even more.”
North Korea’s unofficial exchange rate is formed in the country’s “jangmadang,” local markets that have grown into a large economy parallel to the strictly government-run system. The official exchange rate has been stable at around 100 won to the dollar for the past decade, a level artificially inflated by the government that no one uses. The unofficial rate is around 5,200 won per dollar.
in the country, so the two outlets that follow the real change, Asia Press International and Daily NK, based in Beijing and Seoul respectively, use secret human networks inside the country to collect their data, according to Jiro Ishimaru, a journalist for Asia Press International and Lee Sang Yong, editor-in-chief of Daily NK.
According to these data, the rate has been stable at around 8,000 won per dollar since early 2013, but the won started to gain ground last year, reaching a monthly average of 4,723 in August, the strongest since June 2012.
“As imports from the North plummeted, the demand for foreign currency also fell”
Many observers say the coronavirus pandemic is behind the rise. The US imposed a full trade and financial embargo in 2017 over the nuclear tests, in addition to already existing United Nations sanctions, but the contraband trade with China kept the country supplied. But all that changed when dictator Kim ordered his borders closed entirely in 2020, according to Lim Soo-Ho, a senior fellow at the Institute for National Security Strategy, a government-funded think tank in Seoul.
“Foreign currencies were still in demand” until then, Lim said. “But as imports from the North plummeted, the demand for foreign currency also fell.”
Imports from China, North Korea’s biggest trading partner, plunged more than 90% year-on-year in every month from August 2020 to February this year, and the number has continued to fall, according to the Trade Association. Korea International, a trading group in Seoul. Satellite images show how the bridges and roads used by illegal trade between North Korea and China have been empty since the border was closed, according to Ramón Pacheco Pardo, a professor of international relations at King’s College London.
The fall in imports is not the only reason for the increase, explains Professor Kim. The strong rise in the won means that foreign currencies are no longer a safe haven for North Korean families, and that suggests that the government has launched some kind of government crackdown on them, he warned. “Even though imports fell, the won would not have strengthened as much if the dollar continued to be in strong demand in local markets,” Kim said.
Many retail outlets in the capital, Pyongyang, have stopped accepting dollars or prepaid cards with currency as a means of payment for the few foreigners living in the country, now asking them to pay in won, the Russian embassy said in a Facebook message in October of last year. And financial authorities were ordering residents to disclose their foreign currency savings and deposit them in banks, the independent Daily NK reported in April this year.
Most North Koreans keep their dollars at home and use them to trade goods outside of state-regulated markets, according to Kang Mijin, chief executive of NK Investment Development, a data services company that provides market research and information. from North Korea. This form of saving had skyrocketed since, in 2009, the government suddenly decided to reduce the value of citizens’ won by 90%, wiping out the wealth of families that did not save in foreign currency.
“It is possible that the North has taken advantage of this period of extreme isolation” – as opposed to the “normal” isolation that the country is experiencing – “as an opportunity to restore its control over the population”, believes Professor Kim. “And for the government to maintain its control over that system, the key would be to return to the won”, for which, beyond the prohibitions, it needs to restore the confidence of citizens in it or, at least, reduce confidence in it. the rest of currencies.
Kang speculates that North Korea may be trying to shield its people from economic hardship by strengthening the won and, in turn, causing deflation. There is also a theory that shadowy North Korean forex brokers may be accelerating gains by manipulating a market that by definition operates in an illegal environment. Whatever the truth, analysts say the won’s unusual rise in value will not end well.
The drop in trade and a stronger currency are the result of a broken economic system, the Korea Development Institute, a South Korean state think tank, said in a January report. In his opinion, North Korea could be experiencing its worst economic crisis since the 1990s.
more uncertainty
Although it is possible that the currency’s rise could benefit government-backed companies and households without dollars, the increasing volatility is negative for the country as a whole. For Choi Ji-young, a researcher at the Korea National Unification Institute, the shock that this change is causing in markets will increase uncertainty and make it more difficult to allocate resources, he wrote.
For “ordinary North Koreans, it’s a warning sign,” says Pardo. “The poorest North Koreans, who have the least access to the won, could see their standard of living deteriorate compared to those who have more free access to the currency.”
Choi Eunju, a researcher at the Sejong Institute, a private think tank covering unification studies and foreign policy in Seongnam, a city south of Seoul, is not so pessimistic. “The Kim regime has paid more attention to public opinion than any other government,” Choi said, noting that official comments since the pandemic began suggest the government is trying to prevent this from becoming a social problem. “But if the current situation continues for an extended period of time, things could get ugly,” he warned.
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