Why is North Korea’s currency rising against the US dollar? | Business and finance news

In normal economies, currencies weaken in difficulty, but something counter-intuitive happens in North Korea: winning increases just as it gets worse.

Kim Jong-un’s country has been hit by the toughest sanctions in its history, massive flood damage and an unparalleled pandemic that disrupted most of the trade. The economy showed its sharpest decline in more than two decades last year, while its people are facing one of the worst food shortages in more than 10 years.

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

There are competing theories as to why this is happening, from Kim’s pandemic border closure that kills demand for foreign currencies to the isolated country that is fighting against their use. Whatever the reason, most observers agree that it is not good.

“A currency normally weakens 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 Nordic countries may be trying to increase profits to support the economy, but continuing with such attempts “could harm the real economy even more.”

North Korea’s unofficial exchange rate, which is tracked by the two news media, is being formed in 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 past decade, an artificially strong level with no use as an indicator. The unofficial rate is about 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 in 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 currencies on jangmadang.

According to the Daily NK, the exchange rate has generally been stable at around 8000 won per dollar since the beginning of 2013, but the winner 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 increase.

The United States imposed a full trade and financial embargo in 2017, in addition to sanctions already imposed by the UN, but goods still entered 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 researcher at the Institute for National Security Strategy, a state-funded think tank in Seoul.

“Foreign currencies were still in demand,” until then, Lim said. “When imports to the north crashed, demand for overseas currencies also continued to fall.”

Imports from China, North Korea’s largest trading partner, fell more than 90% year-on-year every month from August 2020 to February this year, and declines continue thereafter, according to the Korea International Trade Association, a trading group in Seoul. Satellite images show how once occupied 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 made mean that foreign currencies have lost their appeal in North Korea as well, and this indicates some form of government struggle against their use, he said.

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

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

Financial authorities ordered residents to report their holdings of foreign currency and deposit them in banks, the Daily NK reported in April, referring to an unidentified person in North Korea who is aware of 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 computer services company that provides research and information on North Korean markets. This is especially true because a massive currency reform in 2009 in 2009 reduced the value of their won holdings by more than 90%.

“The Nordic countries may have taken this period of isolation as an opportunity to restore their socialist systems,” says Kim National University Kim. “And for the government to retain control of that system, the key would be to return to what it won.”

North Korea can try to protect its people from economic difficulties by strengthening what they have won and in turn causing deflation, says Kang from NK Investment Development.

There is even a theory that mysterious North Korean currency brokers can accelerate the gains gained through speculative trading.

Regardless of the truth, it is analysts who say that the usual unusual upswing will not end well.

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

While foreign exchange gains may benefit state-sponsored companies and households that do not have 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 state-affiliated research institute, wrote in a newspaper in August. Turbulent markets increase uncertainty and hinder the distribution of resources, 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 have more free access to 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 less 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 hard to prevent this from becoming a social issue.

“But if the current situation continues for a long time, things can get ugly,” she said.

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

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