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NORTH KOREA NEWSLETTER NO. 95 (February 25, 2010)
*** TOPIC OF THE WEEK (Part 2)

North Korea's Currency Reform Seen as Fizzling

SEOUL (Yonhap) -- North Korea's currency reform seems to be fizzling out as the socialist country remains trapped in a vicious circle of skyrocketing prices, deteriorating food shortages and social unrest following the shock in late November, analysts say.

   North Korea redenominated its currency Nov. 30 as part of efforts to rein in galloping inflation and reassert its control over a burgeoning free market. Old notes were swapped for new bills at a rate of 100 to one.

   The measure also pulled the plug on street markets that have sprung up in recent years. Restrictions were also slapped on the use of foreign currency such as the U.S. dollar and the Chinese yuan.

   Nearly three months after, the currency change appears to have failed to serve its intended purpose, and there are clear indications that the shock therapy has resulted in a strong backlash, sending the regime scrambling to undo some of the reforms, according to Pyongyang watchers in Seoul.

   As widely expected, the currency change has led to serious side effects -- soaring inflation, a severe bottleneck in the supply of daily goods and ensuing difficulties in North Korean people's lives, they noted.

   The gravest problem is a spike in prices of rice and other necessities, they noted. A kilogram of rice, which fetched 20 won shortly after the currency reform, spiked as high as 600 won in late January, more than wiping out the effect of the redenomination that was meant to raise the currency's value.

   Soaring prices have inevitably led to the sharp appreciation of the U.S. dollar and the Chinese yuan, which makes it harder for the isolated North to import necessary goods. "The North Korean currency tumbled from 30 won to the greenback in early December last year to 530 won as of late January," said a source familiar with North Korean issues.

   Citing an unidentified source in Beijing, Yomiuri Shimbun, one of Japan's leading dailies, reported Feb. 9 that the value of the new North Korean currency against the yuan has fallen to one-tenth of its level two months earlier.

   As of Feb. 8, the North Korean currency was changing at 55 won to the yuan, compared with 20 won on Jan. 20 and 5 won in early December, according to the newspaper. North Korea's Foreign Trade Bank posted the official won-yuan exchange rate at 14.19 won against the yuan on Jan. 1, but the bank has not announced its won-yuan quotes since then.

   Amid a worsening food situation, the ban on street markets reportedly led to some residents starving to death as food became unavailable. "People in Tanchon City in South Hamgyong Province are suffering the most in the country, with many residents in the region dying from hunger throughout January," said Good Friends, a Seoul-based human rights group, in its newsletter Feb. 2. "The number of workers suffering from hunger and failing to go to work has increased, and more than one person dies every day from starvation."

   Citing informed sources, the Daily NK, a Seoul-based Internet newspaper that specializes in North Korea's internal affairs, reported Feb. 2 that there had been even scuffles between North Korean citizens and security personnel cracking down on street markets.
As the aftereffects of the currency change and market closure are getting out of control, the North Korean regime seems to have made an about-face and begun easing restrictions on markets, according to informed sources.

   "I hear that the North Korean authorities recently reallowed trading of all goods, including manufactured goods, through markets," a source said, asking not to be identified. "Markets in large cities, which had been closed, began transactions partially."

   Another source, who engages in trade with North Korea, said, "Some stores in a market on Pyongyang's unification street started operations, beginning from late January. In addition, shops carrying foreign goods again began operations."
But there were few people willing to convert the North Korean won into the U.S. dollar and buy those goods because of the large difference between the government-set foreign exchange rate and market rates, according to the source.

   In December, the North Korean authorities banned the direct use of dollars. Instead, North Korean residents were required to convert their dollars into won at state-designated money exchanges before using them. At that time, the official exchange rate was 30 won to the dollar.

   In a sign of Pyongyang reallowing street markets, the North Korean government announced a list of government-set prices for staple products in a desperate bid to keep galloping inflation in check, the Daily NK reported Feb. 5.

   "The North Korean government put up notices of state-set prices for 100 goods at the entrances of street markets across the nation on Feb. 4," reported the Daily NK, citing informed sources in the socialist country. "The notice carried a warning that the state will seize all products sold at prices higher than the government-set prices."

   According to the list, a kilogram of rice should sell for 240 won and a kilogram of pork, for 700 won. "Government-set prices are far lower than market prices, thus sparking confusion among merchants," it said. In addition, the North Korean authorities posted new official forex rates: 400 won to the U.S. dollar and 58.8 won to the Chinese yuan, according to the Daily NK
With public anger mounting, North Korean Premier Kim Yong-il has apologized for the bungled currency overhaul, Good Friends said in its Feb. 9 newsletter. "Kim expressed regret for confusion and instability caused by wrongly set prices at state-run shops during a recent meeting of senior members of the Pyongyang municipal people's committee," the group said, citing its contacts in the socialist country. Premier Kim is in charge of the economy under leader Kim Jong-Il.

   In addition, North Korea reportedly fired the chief architect of the currency reform. Pak Nam-gi, chief of the planning and finance department of the ruling Workers' Party, oversaw the currency revaluation and was blamed for the sharp rise in prices and social chaos following the reform. He may have been fired from his post, according to North Korea watchers in Dandong, China, a city near the border with North Korea.

   While viewing such developments in the North as Pyongyang's admission of its failure in the currency redenomination, North Korea watchers in Seoul say it is still too early to say that the move has been aborted.

   Cho Han-beom, a senior research fellow at the Korea Institute for National Unification in Seoul, said that North Korea has taken the wrong approach to its fundamental problems: a production shortage and an undersupply of key products.

   "North Korea's current economic crisis stems from low production and an absolute supply shortage, which in turn is attributable to its socialist planned economy," Cho said. "To solve such problems, the North should liberalize and privatize production, but it has so far focused on improving distribution and rationing systems." Last year's currency reform is line with such an approach, so it has a low possibility of success like the socialist country's economic reforms in 2002, he added.

   Kim Yong-hyun, a North Korea studies professor at Dongguk University in Seoul, said it still is premature to judge the North's currency overhaul as a failure. "North Korea seems to face difficulties because it cannot secure necessary goods from outside, but we should not judge that its currency reform has failed."