In normal economies, currencies weaken in difficulty, but something counter-intuitive is happening in North Korea: gains are rising, just as things are getting worse.
Kim Jong Un’s country has been hit by the harshest sanctions in its history, massive flood damage and an unprecedented pandemic that disrupted most of its trade. The economy experienced its sharpest decline in more than two decades last year, while its people face 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 a monthly average based on the figures reported by the two media organizations tracking it. This is followed by an increase of 15% in 2020.
There are competing theories as to why this is happening, ranging from Kim’s pandemic border closure, which is killing the demand for foreign currencies, to the isolated country imposing a reduction in their use. Whatever the reason, most observers agree that it is not good.
“A currency usually falls when a country faces problems, but the opposite happens in North Korea,” said Kim Byung-yeon, a professor of economics at Seoul National University. The North may be trying to increase the gains to support the economy, but continuing such attempts “could end up hurting the real economy even more.”
North Korea’s unofficial exchange rate, tracked by the two news outlets, is forming on the country’s “jangmadang”, local markets that have grown into a large informal economy. Its official exchange rate has been stable at around 100 won per dollar over the last decade, an artificially strong level with no use as an indicator. The unofficial rate is around 5,200 won per. Dollar.
Running a private currency exchange is illegal in North Korea, so the two media companies, Asia Press International of Japan and Seoul-based Daily NK, use secret human networks inside the isolated country to compile their rates, according to Jiro Ishimaru, a journalist at Asia Press International, and Lee Sang Yong, editor-in-chief of Daily NK. They get information about trading the currencies on jangmadang.
According to the Daily NK, the exchange rate was generally stable at around 8,000 won per dollar since the beginning of 2013, but it won started winning last year and reached a monthly average of 4,723 in August, the strongest since June 2012.
Many observers say the coronavirus pandemic is behind the rise.
The United States imposed a full trade and financial embargo in 2017 on top of sanctions already in place from the UN, but goods still entered North Korea, smuggled in 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 state-funded think tank in Seoul.
“Foreign currency was still in demand” until then, Lim said. “As imports to the Nordic region crashed, so did demand for overseas currencies.”
Imports from China, North Korea’s largest trading partner, fell more than 90% year on year each month from August 2020 to February this year, with declines continuing thereafter, according to the Korea International Trade Association, a trading 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, professor of international relations at King’s College London.
The decline in imports is not the only reason for the increase, according to Seoul National University’s Kim. The gains gained imply that foreign currencies have also lost their appeal in North Korea, and this suggests some form of government action against their use, he said.
“Even if imports fell, the gain would not have strengthened as much if the dollar remained in demand in local markets,” Kim said.
Many shops in the capital Pyongyang have stopped accepting dollars or prepaid overseas currency cards from foreigners in the country, asking them instead to pay the winnings, the Russian embassy said in a Facebook post last October.
Financial authorities ordered residents to report their foreign currency holdings and deposit them in banks, the Daily NK reported in April, citing an unidentified person in North Korea who was familiar with the matter.
Most North Koreans keep their dollars at home and use them to trade 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 especially true when a massive currency reform in 2009 reduced the value of their won holdings by more than 90%.
“The Nordic region may have taken this period of isolation as an opportunity to restore its socialist systems,” Kim said at Seoul National University. “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 again causing deflation, Kang from NK Investment Development said.
There is even a theory that mysterious North Korean currency brokers can accelerate winning gains through speculative trading.
Whatever the truth, analysts say the won unusual rise does not end well.
The decline in trade and the strengthening of the 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.
Although the gains of the currency may benefit companies and households that do not support the dollar, 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 a newspaper in August. Turbulent markets increase uncertainty 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 researcher at the Sejong Institute, a private research center covering association studies and foreign policy in Seongnam, a city south of Seoul, is not so pessimistic.
“Kim’s regime has placed more emphasis on public sentiment than any other government,” Choi said, noting that official remarks since the pandemic began suggest the government is trying hard to prevent this from becoming a social issue.
“But if the current situation continues for an extended period of time, things can get ugly,” she said.
– With the help of Jeong-Ho Lee, Daedo Kim, Alex Sazonov, Marcus Wong and Daniel Ten Kate.