Home North Korea
2009/12/03 11:40 KST
NORTH KOREA NEWSLETTER NO. 83 (December 3, 2009)


North Korea Conducts Surprise Currency Reform: Sources

SEOUL (Yonhap) -- North Korea has reportedly redenominated its currency, the country's first monetary reform in 17 years, in an apparent attempt to curb runaway inflation, crack down on rampant black-market trading and thus resuscitate its moribund economy.

   North Korean sources who trade with China in the eastern Chinese city of Shenyang said the currency reform came into force as of 11 a.m. on Nov. 30 and the exchange for new banknotes started at 2 p.m. that day.

   With the conversion rate set at 100 to 1, the blitzkrieg move forces North Koreans to swap 1,000-won notes for new 10-won bills until Dec. 6, according to the sources, who spoke on condition of anonymity.

   As of Dec. 2, North Korea's official media remained silent about the move, unlike in the past when it made official announcements on the day the currency reforms were implemented. South Korean officials, meanwhile, say they cannot confirm the reported currency revamp.

   "North Korean media have not reported on a currency reform so far," Seoul's Unification Ministry spokesman Chun Hae-sung said on Dec. 1. "We checked the state media today, including Rodong Sinmun, but there was no such report."

   No signs of the currency reform were detected yet in joint economic projects, such as the industrial park in the North Korean border town of Kaesong, where South Korean investors pay North Koreans wages in dollars, the spokesman added.

   Good Friends, a Seoul-based aid group that has sources inside North Korea, said on Dec. 2 the North Korean Cabinet made a "decision" on the currency revamp designed to "stabilize and improve the lives of the people as well as correct the managerial system and order of the economy."

   In a dispatch from the North Korean capital of Pyongyang, China's Xinhua news agency said on Dec. 1 that the North's Foreign Ministry had sent verbal notices to foreign embassies in Pyongyang the day before. Foreign embassies in South Korea confirmed the report, saying their missions in Pyongyang received a verbal notice from the North's Foreign Ministry.

   North Korean watchers in Seoul say Pyongyang's surprise move appears to be aimed at reining in inflation and thwarting illegal currency transactions in order to help revive its ailing economy.

   "This currency reform is forcing deflation in order to keep inflation in check," said Park Hyung-joong, a researcher at the Korea Institute for National Unification in Seoul. "The step may have a short-term effect, but it could plunge the North Korean economy into a slump over the long haul."

   North Korea has been waging a nationwide campaign to rebuild its stagnant economy by 2012, the birth centennial of the late Kim Il-sung, the country's founder and father of current leader Kim Jong-il.

   In the aftermath of severe food shortages in the late 1990s, which allegedly starved millions of North Koreans to death, Pyongyang adopted tentative market reforms in 2002 to tide over an economic crisis and help ease the hardships of its citizens.

   Albeit taken at a gradual pace, the measures included some elements of a market economy, which unexpectedly boomeranged on North Korea, combined with such internal problems as shortages of energy and raw materials, poor infrastructure and its low factory operating rate, according to the watchers.

   The ensuing side effect was an inflationary spiral. The purchasing power of the North Korean currency has plummeted since the 2002 economic reforms. According to Open Radio for North Korea based in Seoul, one kilogram of rice sells for 1,500-1,600 won in Pyongyang, where ordinary workers earn around 3,000 won per month.

   The redenomination is also seen as seeking to flush out hidden money, some socked away by citizens working abroad, which could be used to turn around the teetering North Korean economy, according to experts in Seoul.

   "From an economic standpoint, the North Korean government will be able to retrieve banknotes that people have kept under the mattress," said Yang Moon-soo, an economist at the University of North Korean Studies in Seoul. "In that process, those who have legally or illegally squirreled away a large amount of money will be exposed. There will be less cash in circulation and more government control of the people."

   Dong Yong-sueng, a North Korea analyst at the Samsung Economic Research Institute, the research arm of Samsung Group, said North Korea seems to be trying to normalize its financial sector as part of the 2012 economic reconstruction campaign, but that the sudden, drastic change could trigger a public backlash. "North Korea appears to have carried out the reform so secretly and suddenly that no one could have prepared for it," Dong said.

   Other analysts even speculate that the currency overhaul is part of leader Kim Jong-il's efforts to tighten control over his nation's 24 million people as he prepares to hand over power to his youngest son Jung-un.

   The 67-year-old leader, who suffered a stroke in August last year, has reportedly tapped his youngest son Jong-un as successor.

   The currency overhaul was the first for North Korea since 1992 and the fifth since its first currency reform in December 1947. According to the North's fixed exchange rate before the redenomination, a U.S. dollar officially changed hands at 135 North Korean won.

   Months before establishing its Soviet-backed government separately from pro-U.S. South Korea in September 1948, North Korea conducted its first currency reform, ending the monetary legacy of Japan's 1910-45 colonial occupation of the Korean Peninsula. The reform replaced banknotes issued during the colonial era with new bills issued by the North's Central Bank on a one-to-one basis.

   In February 1959, Pyongyang conducted its second currency reform to curb inflation caused by the 1950-53 Korean War, refresh the financial management system and equip the government with investment resources for state-led post-war rehabilitation. The exchange rate was 100 to 1 at that time.

   The third revamp was implemented in April 1979 at a one-to-one exchange rate. Government institutions, businesses and cooperative organizations deposited their reserves of old denominations in banks and received new banknotes.

   In July 1992, the fourth reform took effect, aiming to consolidate the local currency system. The Central Bank began issuing five types of new banknotes valued at 100 won, 50 won, 10 won and 1 won. The exchange rate was 1 to 1.

   The redenomination, meanwhile, has reportedly thrown the country into chaos, panicking residents into rushing to black markets to convert socked-away money into dollars and Chinese yuan.
Daily NK, a Seoul-based Internet newspaper that specializes in North Korea's internal affairs, said the surprise move has thrown shops and markets into utter disarray. "After the news of the currency exchange spread, North Korean markets and workplaces came to a complete halt," the report quoted an unidentified North Korean source as saying.