Why is the currency of North Korea rising against the US dollar?

In normal economies, currencies weaken in times of trouble, but something counterintuitive is happening in North Korea: The won is rising just as things take a turn for the worse.

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

But the North Korean won is up 25% against the dollar this year, calculated on an average monthly basis using figures reported by the two news outlets that track it. That follows a 15% increase in 2020.

There are competing theories about why this is happening, ranging from Kim’s pandemic border closing that wiped out demand for foreign currencies to the isolated country that instituted a crackdown on their use. Whatever the reason, most observers agree that it is not good.

“A currency normally depreciates when a country is in trouble, but the opposite is true in North Korea,” said Kim Byung-yeon, an economics professor at Seoul National University. The North may be trying to boost the won to support the economy, but continuing those attempts “could end up hurting the real economy further.”

North Korea’s unofficial exchange rate, which is tracked by the two media outlets, is formed in the country’s “jangmadang,” local markets that have grown into a large informal economy. Its official rate has been stable at around 100 won to the dollar for the past decade, an artificially strong level with no use as an indicator. The unofficial rate is around 5,200 won to the dollar.

Conducting a private currency exchange is illegal in North Korea, so the two media companies, Japan’s Asia Press International and Seoul-based Daily NK, use secret human networks within the isolated country to compile their rates, according to Jiro Ishimaru, journalist for Asia Press International and Lee Sang Yong, editor-in-chief of the Daily NK. They get information about currency trading on the jangmadang.

According to Daily NK, the rate has held steady at around 8,000 won to the dollar since early 2013, but the won began to gain last year, hitting a monthly average of 4,723 in August, the strongest since June 2012.

Many observers say that the coronavirus pandemic is behind the increase.

The United States imposed a full trade and financial embargo in 2017, in addition to existing United Nations sanctions, but the goods still made it to North Korea, smuggled in from China.

But all that changed when North Korea closed its borders 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. “As imports from the North plummeted, demand for foreign currency also continued to decline.”

Imports from China, North Korea’s biggest trading partner, fell more than 90% 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-occupied bridges and roads between North Korea and China were left empty after the border closed, according to Ramon Pacheco Pardo, professor of international relations at King’s College London.

Falling imports is not the only reason for the increase, according to Kim of Seoul National University. The won’s gains mean that foreign currencies have also lost their appeal within North Korea, and that suggests some kind of government crackdown on their use, he said.

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

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

Financial authorities were ordering residents to report their holdings of foreign currencies and deposit them in banks, Daily NK reported in April this year, 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. That’s especially true since a massive currency reform in 2009 reduced the value of their won holdings by more than 90%.

“The North may have seized this period of isolation as an opportunity to restore its socialist systems,” said Kim of Seoul National University. “And for the government to maintain control over that system, the key would be to go back to the cattle.”

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

There is even a theory that North Korea’s mysterious forex brokers may be accelerating won gains through speculative trading.

Whatever the truth, analysts say the won’s unusual rise will not end well.

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

While the currency’s gain may benefit government-backed companies and dollar-less households, rising volatility is negative for the country as a whole, Choi Ji-young, a researcher at the Korea National Unification Institute, a South Korean government-affiliated research institute, wrote in an August article. Turbulent markets increase uncertainty and make it difficult to allocate resources, he wrote.

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

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

“The Kim regime has paid more attention to public sentiment than any other government,” Choi said, noting that official comments since the pandemic began suggest that the government is trying to prevent this from becoming a social problem.

“But if the current situation continues for an extended period, things could get ugly,” he said.

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



Reference-www.aljazeera.com

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