Why is the North Korean currency soaring against the US dollar? | Business and Economy News

In normal economies, currencies weaken in times of difficulty, but something counterintuitive is happening in North Korea: the won is soaring just as things get worse.

Kim Jong Un’s country has been hit by the toughest sanctions in its history, massive flood damage and an unprecedented pandemic that has cut off most of its trade. The economy recorded its biggest decline in more than two decades last year, as its population faces one of the worst food shortages in more than 10 years.

But the North Korean won has jumped 25% against the dollar this year, calculated on an average monthly basis using figures reported by the two media that track it. This follows a 15% increase in 2020.

There are competing theories as to why this is happening, ranging from Kim’s pandemic border closure killing demand for foreign currency to the isolated country instituting a crackdown on their use. Whatever the reason, most observers agree that this is not a good thing.

“A currency normally depreciates when a country is facing problems, but the opposite is the case in North Korea,” said Kim Byung-yeon, professor of economics at Seoul National University. The North may be trying to raise the won to support the economy, but continued attempts “could end up hurting the real economy even more.”

North Korea’s unofficial exchange rate, which is monitored by both news organizations, is forming in the country’s “jangmadangs,” local markets that have grown into a large informal economy. Its official rate has remained stable at around 100 won to the dollar over the past decade, an artificially high level of no use as an indicator. The unofficial rate is approximately 5,200 won to the dollar.

Operating a private bureau de change is illegal in North Korea, so the two media companies, Asia Press International of Japan and Seoul-based Daily NK, are using secret human networks inside the country. isolated to compile their rates, according to Jiro Ishimaru, a reporter for Asia Press International and Lee Sang Yong, editor of the Daily NK. They get information about currency trading at jangmadang.

According to Daily NK, the rate has generally been stable at around 8,000 won to the dollar since early 2013, but the won started to gain last year, hitting a monthly average of 4,723 in August, the highest since June 2012.

Many observers say the coronavirus pandemic is behind the outbreak.

The United States imposed a full trade and financial embargo in 2017, in addition to sanctions already in place by the United Nations, but goods still entered North Korea from China.

But that all changed when North Korea closed 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.

“Foreign currency was always in demand,” Lim said. “As imports into the North collapsed, demand for foreign currency also continued to decline. “

Imports from China, North Korea’s largest trading partner, fell more than 90% year-on-year from August 2020 to February this year, with declines continuing subsequently, according to the Korea International Trade Association, a Seoul-based trading group. Satellite images show how the once busy bridges and roads between North Korea and China became empty after the border was closed, according to Ramon Pacheco Pardo, professor of international relations at King’s College London.

Falling imports are not the only reason for the rise, according to Kim of Seoul National University. The won’s gains imply that foreign currencies have also lost their appeal in North Korea, suggesting some sort of government crackdown on their use, he said.

“Even if imports fell, the won would not have strengthened as much if the dollar had remained in demand in local markets,” Kim said.

Many outlets in the capital Pyongyang have stopped accepting dollars or foreign currency prepaid cards from foreigners in the country, and instead require them to pay in won, the Russian embassy said in an article on Facebook in October of last year.

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

Most North Koreans keep their dollars at home and use them to exchange goods, according to Kang Mijin, CEO of NK Investment Development, a data services company that provides research and information on North Korean markets. This is all the more true as a massive monetary reform in 2009 reduced the value of their won holdings by more than 90%.

“The North may have taken advantage of this period of isolation to restore its socialist systems,” said Kim of Seoul National University. “And for the government to retain control over this system, the key would be to revert to the won.”

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

There is even a theory that mysterious North Korean currency brokers could accelerate won gains through speculative trading.

Whatever the truth, analysts say the unusual push of the will won’t end well.

The decline in trade and the strengthening currency indicate a broken economic system, the Korea Development Institute, a South Korean state-run think tank, said in a January report. North Korea could face its worst economic crisis since the 1990s, he said.

While the currency’s gain may benefit government-backed businesses and households that do not hold dollars, the rising volatility is negative for the country as a whole, Choi Ji-young, a researcher at the Korea Institute for National Unification, a South Korean government-affiliated research institute, wrote in an August article. Turbulent markets increase uncertainties and hamper resource allocation, she wrote.

To “ordinary North Koreans, this is a warning sign,” said Pardo of King’s College London. “The poorest North Koreans, who are the ones with the least access to the won, may see their standard of living deteriorate compared to those who can access the currency more freely.”

Choi Eunju, a researcher at the Sejong Institute, a private research center covering unification studies and foreign policy in Seongnam, a city south of Seoul, is not so pessimistic.

“Kim’s regime has paid more attention to public sentiment than any other government,” Choi said, noting that official remarks since the start of the pandemic suggest the government is working to prevent this from happening. a social problem.

“But if the current situation continues for an extended period, things could turn out badly,” she said.

–With help from Jeong-Ho Lee, Daedo Kim, Alex Sazonov, Marcus Wong and Daniel Ten Kate.

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