The mysterious surge of North Korea’s currency

Many observers say the coronavirus pandemic is behind the surge.

The US imposed a full trade and financial embargo in 2017, on top of sanctions already in place from the United Nations, but goods still made it into North Korea, smuggled in from China.

But that all changed when North Korea shut its borders in 2020, according to Lim Soo-Ho, a senior researcher at the Institute for National Security Strategy, a government-funded think tank in Seoul.

“(For) ordinary North Koreans, it’s a warning sign. The poorest North Koreans, who are the ones who have less access to the won, could see their standard of living deteriorate compared to those who can more freely access the currency.”

Ramon Pacheco Pardo, a professor of international relations at King’s College London.

“Foreign currencies were still in demand” until then, Lim said. “As imports into the North crashed, demand for overseas currencies kept falling, too.”

Imports from China, North Korea’s biggest trading partner, dropped more than 90 per cent year on year every month from August 2020 to February this year, with declines continuing thereafter, according to the Korea International Trade Association, a trade group in Seoul. Satellite images show how once-busy bridges and roads between North Korea and China became empty after the border closure, according to Ramon Pacheco Pardo, a professor of international relations at King’s College London.

The slump in imports isn’t the only reason for the surge, according to Seoul National University’s Kim. The won’s gains imply that foreign currencies have lost their allure within North Korea, too, and that suggests some kind of government crackdown on their use, he said.

“Even though imports dropped, the won wouldn’t have strengthened so much if the dollar remained in demand in the local markets,” Kim said.

Many retail outlets in the capital Pyongyang have stopped accepting dollars or prepaid overseas currency cards from foreigners in the country, and are instead asking them to pay in won, the Russian embassy said in a Facebook post in October last year.

Financial authorities were ordering residents to report their holdings of foreign currencies and deposit them in banks, Daily NK reported this April, citing an unidentified person in North Korea familiar with the matter.

Most North Koreans keep their dollars at home and use them to trade goods, according to Kang Mijin, chief executive officer of NK Investment Development, a data services company that provides research and information on North Korean markets. That’s especially true since a massive currency reform in 2009 cut the value of their won holdings by more than 90 per cent.

“The North may have taken this period of isolation as an opportunity to restore its socialist systems,” said Seoul National University’s Kim. “And for the government to retain its control over that system, the key would be to return to the won.”

North Korea may be trying to protect its people from economic hardship by strengthening the won and in turn causing deflation, Kang of NK Investment Development said.

There’s even a theory that mysterious North Korean currency brokers may be accelerating the won’s gains through speculative trading.

Whatever the truth is, analysts say the won’s unusual surge won’t end well.

The drop in trade and strengthening currency point to a broken economic system, the Korea Development Institute, a South Korean state-run think tank, said in a January report. North Korea may be facing its worst economic crisis since the 1990s, it said.

While the currency’s gain may benefit government-backed companies and households who don’t hold dollars, the increasing volatility is negative for the country as a whole, Choi Ji-young, a research fellow at the Korea Institute for National Unification, a South Korean government-affiliated research institute, wrote in an August paper. Turbulent markets increase uncertainties and hinder resource allocation, she wrote.

For “ordinary North Koreans, it’s a warning sign,” said Pardo of King’s College London. “The poorest North Koreans, who are the ones who have less access to the won, could see their standard of living deteriorate compared to those who can more freely access the currency.”

Choi Eunju, a research fellow at Sejong Institute, a private research centre covering unification studies and foreign policy in Seongnam, a city south of Seoul, isn’t as pessimistic.

Loading

“Kim’s regime has paid more attention to public sentiment than any other government,” Choi said, noting that official remarks since the pandemic started suggest the government is trying hard to prevent this becoming a social issue.

“But if the current situation keeps going for an extended period of time, things could turn ugly,” she said.

Bloomberg

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.