North Korean Economy Watch

According to Yonhap:

North Korea’s new currency introduced in late November has plummeted in value compared to the Chinese yuan, a local radio broadcaster claimed Sunday.

The Seoul-based Open Radio for North Korea (ORNK), citing unidentified sources along the Sino-North Korean border, said that merchants were exchanging one yuan for 1,000 new North Korean won as of late last month, plummeting from the 50 won traded for every yuan on Dec. 3, right after Pyongyang introduced the new currency.

Under the move, the communist country knocked two zeros off its currency without warning on Nov. 30 in the first such value adjustment since 1959.

The radio, which aims to inform North Koreans on events happening in the outside world, said the value of the new North Korean currency fell to 520 won to the yuan by the middle of last month, indicating a steady depreciation throughout the month.

Before the currency reform took place, 1 yuan was worth around 588 old won, which is equivalent to 5.88 new won.

The ORNK speculated that the reason for the new currency’s weakness may be Pyongyang’s decision to not allow foreign currency to circulate in the market.

“The official proclamation to ban foreign currency use was made on Dec. 28, but there have been rumors circulating after the currency reform took place, causing the new won to depreciate against Chinese money,” the radio station report said.

It said that with Pyongyang unlikely to allow the use of foreign money as a medium of exchange or to bolster its new currency, it may be hard to determine when the value of the new won will stop falling.

North Korean media reported early last month that authorities were introducing new money to curb the mushrooming free market and raise the value of the country’s legal tender.

There have been unconfirmed reports that the currency reform has drawn resistance from ordinary citizens and merchants, whose savings have been drastically cut by the unannounced measures.

Read the full article here:
N. Korea’s new currency plummets against Chinese yuan: report
Yonhap
1/3/10

Additional info:

1. Previous posts on the DPRK’s recent monetary changes can be found here.

According to ABC News:

North Korea has banned the use of foreign currency, another sign its hard-line communist government is intent on reasserting control over the country’s nascent market economy.

Reports say the decree warns of severe punishment for anyone using U.S. dollars, euros, yuan and other non-North Korean currencies. Foreign currencies previously were accepted in some shops, restaurants and other outlets, particularly those catering to foreigners.

The order, issued by North Korea’s state security bureau and going into effect Jan. 1, aims to “forbid the circulation of foreign currency,” China’s state-run CCTV television said in a brief report late Wednesday.

The Daily NK, a Seoul-based online news outlet, said the order prohibits all individuals and organizations apart from banks from possessing foreign currency. It said the decree was posted in public and at workplaces, and went into effect Dec. 28.

There was no mention of the new ban Thursday in official North Korean state media. In Seoul, a South Korean official confirmed the ban, speaking on condition of anonymity because he was not authorized to speak to the media on intelligence matters.

The order comes weeks after the government redenominated North Korea’s currency, the won, as part of a far-reaching currency overhaul aimed at curbing runaway inflation and reasserting control over the economy.

The latest currency decree gives businesses 24 hours to deposit all foreign currency in banks. “When it is needed for trade, it can be withdrawn after obtaining approval,” it said, according to the Daily NK.

The ban is aimed at seizing foreign money tucked away by those still engaging in private market commerce, analysts said.

“North Korea has a problem with people trying to exchange their money for foreign currencies, and then storing the savings in their cabinets since they don’t know how the value of the local currency might change, said Jeong Kwang-min, a research fellow at the state-run Institute for National Security Strategy in Seoul.

The new ban shows the regime’s intention to “firmly” resolve and bring the black market under control, Jeong said.

“The ban is meant to root out people still trading at markets,” said Yang Moo-jin of Seoul’s University of North Korean Studies. “More broadly, it’s aimed at smoothly completing the currency reform by restricting the use not only of local currency but also foreign currency.”

The latest ban also applies to foreigners, who must exchange foreign bills into North Korean won in order to purchase items, reports said.

Sweden’s ambassador to North Korea, Mats Foyer, said by e-mail Thursday that he had received no official notification of the decree.

If this policy change does take effect, it will represent the republic’s third foreign exchange management regime.

Initially, the DPRK (like most communist countries) used Foreign Exchange Certificates (FECs) to control the circulation of foreign currency.  When foreigners arrived in Pyongyang, they changed their local money for FECs which could be spent in various sanctioned retail outlets. The DPRK’s Foreign Trade Bank issued FECs which were different from local North Korean won (issued by the central bank) in both color and and purchasing power.  Capitalist Westerners received green FECs and expats from fraternal socialist governments received red FECs.  Coins were also differentiated.

Shopping could be a bit confusing, however.  Price tags could potentially hold three numbers: the green FEC price, the red FEC price, and the won price.  I believe that shops that catered to repatriated Japanese Koreans (such as the Rakwon Department Store near the Changwang Health Complex) were priced in actual yen, but it is possible these individuals were forced to exchange their yen into green FECs.  Expats from fraternal socialist countries reportedly complained because although their governments were underwriting the DPRK, the red FEC prices in department stores were often higher than the green prices.

As in China, FECs were eventually abandoned and hard currency shops and state-owned retailers began accepting hard currency directly. I am not sure how, why, or when this transition occurred, but it was in effect until this week.  Under this regime, tourists, diplomats, business persons and other visitors spent their dollars, euros, yen and yuan directly on goods and services in the DPRK, but the retail outlets in which they were allowed to make purchases were severely limited.  Prices were originally denominated in dollars but in 2004 they were changed to euros (though dollars remained just as acceptable).

Under this regulatory regime, most visitors to the DPRK could arrive and leave without ever seeing any local currency.  Some percentage of the foreign exchange undoubtedly ended up in KWP, KPA, and state coffers, however it is likely that quite a bit was skimmed off the top, legally or otherwise, in the process.  This would explain the shift to the new regime.

This third foreign currency management regime is interesting but not for the reasons cited in the media. In addition to striking a blow at the country’s markets, which it most definitely will, this policy brings all of the overseas trading companies operating under the protection of the KWP, KPA, and select ministries, under the indirect control of the Foreign Trade Bank. Whereas these organizations were previously allowed to hold some level of foreign currency on site for discretionary purposes, they will now be forced to deposit these funds in a Foreign Trade Bank branch or exchange them for won at the official rate. Additionally, all of the future earnings that these organizations generate abroad will need to be handed over for won when their agents return from assignments overseas.  It is highly likely that these companies will choose to keep their earnings overseas rather than repatriating them, or use their earnings to purchase cheaper goods which they can import into the DPRK (while pocketing the difference and keeping it in a foreign bank account).

The implications for tourists, visitors, and expats are also interesting.  This new policy would imply that the Korea Trade Bank will set up currency exchange kiosk at the airports, border crossings, retail outlets, and hotels for foreigners to swap their currency for local won.  Although we will have to declare our hard currency when entering the country, the fact that we are carrying local currency makes it easier for us to take advantage of spontaneous purchases–even potentially from private merchants and restaurants.  In other words, knowing that locals will not come into possession of hard currency, the North Korean government might give us more “economic freedom” in our time there.  Of course this is probably just wishful thinking.  The gap between the official and market exchange rate will also give rise to black market currency traders who will seek out foreigners to the best of their abilities.

Overall, it is difficult to see this policy as anything but a power grab.  Foreign exchange will become more difficult to obtain and so will the goods manufactured or grown overseas (including China). North Koreans will be left with fewer choices and as a result will  come under greater control of the state.  I am willing to believe that most North Koreans have enough sense to predict this outcome as well.  It will be interesting to see how well this policy sticks or whether entrepreneurial North Koreans will find ways to evade the new rules as they have done countless times before.

Additional Links:

1. Here is a link to the original ABC story.

2. Here is a wikipedia page about the DPRK’s monetary history.

3. Here is the Daily NK story mentioned above.

4. Here are previous posts related to the DPRK’s currency revaluation.

5. This Reuters article adds additional information.

6. Here is a report by the Institute for Far Eastern Studies (IFES)

7. Here is a rather humorous report on the “benefits” that the currency fiasco is bringing the North Korean people.

According to the US Treasury Department’s Press Release (h/t One Free Korea):

FinCEN Updated Advisory:
North Korea Government Agencies’ and Front Companies’ Involvement in
Illicit Financial Activities

VIENNA, Va. – The Financial Crimes Enforcement Network (FinCEN) today added an additional North Korean bank to its June 18 guidance to financial institutions regarding the involvement by Democratic People’s Republic of Korea (“North Korea”) government agencies and front companies in illicit activities. Based on new publicly available information, Kumgang Bank has been added to the list of North Korean banks. This update amends the FinCEN issuance of FIN-2009-A002, on June 18, 2009.

As further described in the guidance, the U.N. Security Council has called for enhanced monitoring of financial transactions, to prevent the financing of North Korea’s nuclear, ballistic missile, and other weapons of mass destruction (“WMD”)-related programs or activities. The Security Council’s action, combined with the potential that North Korea will attempt to evade these financial measures, illustrates the increased risk that North Korea and North Korean entities, as well as individuals acting on their behalf, pose to the international financial system and financial institutions worldwide.

FIN-2009-A002 can be read here.

Links to previous posts on sanctioned DPRK organizations (US and UN) can be found here.

UPDATE 20:  It might be possible that public anger over the government’s new monetary policy forced the govenrment to increase the maximum amount of currency that can be converted.  According to the AFP:

North Korea has backtracked on details of its shock currency revaluation following a riot by market traders that led to 12 executions, a report said Tuesday.

South Korea’s Chosun Ilbo newspaper said the hardline communist state had taken a series of steps to placate its people over the 100-to-one revaluation announced two weeks ago.

It said the concessions follow a riot by merchants in the eastern city of Hamhung on December 5-6 which stirred public sympathy. Twelve “masterminds” of the unrest were later executed, the paper said.

It was not possible to confirm the reported riot or executions. But there have been accounts of widespread anger since the regime revalued its currency earlier this month, requiring old banknotes to be exchanged for new ones at the rate of 100 to one.

Analysts said the move was aimed at curbing inflation and clamping down on a growing free-market economy to reassert the regime’s control.

But the initial limit of 100,000 won on the total cash that each person could exchange effectively wiped out many people’s savings in the impoverished nation.

On Sunday authorities raised the limit to 500,000 won, Chosun said, quoting sources in the North.

One hundred thousand won in old money was equivalent to 30-40 dollars at the previous black market rate.

The North also announced that eventually citizens would be allowed to exchange all their old bills for new ones if they deposit the money in banks, Chosun reported.

People reportedly shun banks because they fear investigations into the source of their savings, or restrictions on withdrawals as in the past.

In response, Chosun said authorities promised no probe into savings of up to one million won and unlimited withdrawals if savings of more than one million are properly explained.

The newspaper quoted a high-level North Korean source as saying authorities “are backtracking under pressure from market forces”.

UPDATE 19:  The Daily NK reports that DPRK authorities launched the monetary revaluation without establishing new wages and prices:

A source of Yangkang Provicne explained in a phone conversation with The Daily NK on the 11th, “Wages of workers used to ranged between 1,300 and 2,500 North Korean won.” “If this is put into operation, then the wages of the secretaries of the Provincial Committee of the Party would be leveled to approximately 1,000 won.”

“It was agreed that a precise measure relating to wages was not yet perfect and would be relayed to the accounting clerks at a later time,” the source adds. “Under the decree, all debt relations among existing enterprises would become ‘zero’ and foreign currency earning organizations will hereafter undergo adjustments. However, due to the fact that the size of liabilities between enterprises is not so significant, it is essentially a meaningless measure.”

Unusually, on the morning of the 9th, the lecture broke free from the customary one-sided presentation of the Party decree in favor of audience participation. Attendees stated one after another: “We must establish reasonable prices as soon as possible and stabilize the workers;” “If the food problem is not resolved, then we will not be able to prevent rising prices;” “The existing wages and [state mandated] food prices should be adhered to;” and so on.

In the end, the Yangkang meeting offered a temporary, partial settlement of enterprise wage and debt issues as well as the announcement that more follow-up measures will be introduced in the near future. Authorities also stated that “national course of action” on price-related matters will be subsequently delivered.

The only government-authorized pricing to be finalized involved railway shipping charges. A “temporary” train route table has been posted at the Youth Hyesan Station, with Hyesan-Pyongyang fare set at 46 won and Hyesan-Baegam fare at 18 won.

“When judging by distance, it is almost more expensive to operate intra-provincial trains,” the source observes. “Fixing the Hyesan-Pyongyang cost at 46 won was based on the temporary trains that ran when university students in Pyongyang would return to their hometowns during the early break. There is no other meaning.”

But the fact that other price measures were not announced at the cadres meeting helped maintain a sense of confusion among North Korean citizens. “Nowadays, even when two or three people gather, they will mutter, ‘Where is our country headed?’” bemoans the source. “The state should decide on wages or prices, so the markets can run normally.”

“But since the authorities have been dragging their feet, ordinary citizens have not been able to regain their senses.”

UPDATE 18: According to the Choson Ilbo, the DPRK has banned the entry of foreigners for a period of time and temporarily closed markets:

One source in China said that Pyongyang would bar foreigners from entering the country temporarily at the end or beginning of a year, when customs officials along the border with China are on leave for year-end holidays, but banning them until February is “quite uncommon.”

Experts say this could herald a visit by Kim Jong-il to China, since the paranoid North Korean leader likes to ensure maximum security along the route of his special armored train. Chinese President Hu Jintao invited Kim to visit at a “convenient” time when he met Choi Tae-bok, the chairman of the North’s Supreme People’s Assembly, in October. Kim has visited China four times, and twice (in 2001 and 2006) they fell in January.

But Good Friends, a Seoul-based organization which provides aid to North Korea, in its latest newsletter said North Korean authorities shut down open-air markets for three days starting on Monday after prices of goods soared following the currency revaluation. The North was to reopen the markets after prices adjust.

One researcher with a state-run research institute said, “For North Korea to succeed in its currency reform it needs stable supplies of food and other products, and Pyongyang may have decided that China is the only country it can rely on. That might also make it necessary for Kim himself to visit China.”

More on market closures can be found in Bloomberg.

UPDATE 17: The Daily NK reports that DPRK trading offices and companies on the Chinese border were raided in advance of the currency revaluation to confiscate capital which had accumulated in these offices.  The central government confiscated these resources apparently because they were under the de facto control of various nouveau riche.  

UPDATE 16: According to Australian News.com:

North Korea has set new prices for staple goods after its shock currency revaluation, but most items are selling in markets for more than laid down by the regime, an aid group said overnight.

Citing informants in North Korea, South Korean group Good Friends said the new prices were published last Wednesday.

“Few items sell at the state-set prices, and most of them are trading at higher-than-set prices at the markets of major cities nationwide,” it said in a newsletter.

Rice is selling for 50 won per kilogram at markets in the northeastern port city of Chongjin, more than double the state-fixed price of 23 won, it said.

Other staples such as corn, wheat flour and beans are also selling for more than the government price, it said, adding that pork was a cheaper exception.

UPDATE 15: According to the Daily NK it seems the DPRK authorities are taking the week to educate the lower level party members on how the post-currency reform economy is supposed to function.  These are the same low-level party officials who probably bore the brunt of the DPRK’s monetary “reform” initiative:

Meetings and lectures were convened on the 8th to follow-up on the currency redenomination; explaining prices, wage standards, and payments between factories and enterprises.

A source from Yangkang Province reported the news on Wednesday in a telephone conversation with the Daily NK, “A lecture began at 2 P.M. yesterday. It was administrative education for managers of sub-Party organizations, Primary Party Committee secretaries and accounting clerks in factories.”

The source added, “The meeting was scheduled for the evening of the 9th, but if necessary it may continue on the morning of the 10th.”

These kinds of meetings were also held right after the fourth denomination replacement in 1992 and again after the July 1st Economic Management Reform Measure in 2002.

This time around, there are two kinds of lectures; one for cadres, and a separate one for administrative workers.

In the Yangkang cadres lecture there were major Party cadres from the People’s Committee of Yangkang Province, the Agricultural Accounting Committee of the province, People’s Safety Agency, May 16 Construction Bureau (a temporary organization overseeing each province’s construction projects) and Hyesan Steel Mill; office workers from the financial department of the Yangkang Province People’s Committee, accounting clerks and treasurers from factories and enterprises attended the administrative lecture. The lectures were held in the conference halls of the Provincial Party Committee.

The Hyesan Party Committee also reportedly convened lectures for cadres and workers in the same way in the conference hall of the Municipal Party Committee and the Kim Il Sung Revolutionary Ideology Institute in Hyejang-dong.

In the meetings and lectures, provision of payment and modes of transaction between factories, state designated prices for commodities and services and the setting of an upper limit for market prices were all rumored to be on the agenda.

Among them, wage levels and top limits for jangmadang prices are the most noteworthy items.

On the subject of wages, rumors apparently streamed out from around the conference halls; “They will maintain wage levels as was,” and, “Wage levels will be cut in half.”

If wages are maintained, or even cut in half, the monetary value of wages would increase from 50 to 100 times, or at least they would if prices remained the same.

To this end, the North Korean authorities are also expected to announce detailed rules whereby prices in markets may not exceed state-designated levels.

The source explained, “The state’s policy is to build a world where the people can live on their wages. The reason for the decree about the markets is to prevent prices rising.”

However, economists worry about the impact of these policies. If the authorities are not able to expand supply having raised wages substantially, and then they forcefully reduce market prices, in the long run hyperinflation will result and trading will become all-but impossible.

Especially, if the authorities take to printing money in order to pay for projects related to the construction of the “strong and prosperous state,” an unimaginable aftermath will be created.

Meanwhile, the source explained, “In some regions, food prices are already soaring. Traders don’t like this phenomenon, which at least reassures the authorities about the traders’ attitudes.”

However, he pointed out that even when the market works normally, price levels are not particularly stable.

UPDATE 14: The AFP notes that the currency reform has cripped the DPRK’s markets:

Private markets on which North Koreans rely heavily for necessities have been paralysed since the communist state’s shock currency revaluation last week, a report said Wednesday.

South Korea’s Hankyoreh newspaper quoted sources in China’s border city of Dandong as saying private transactions — which supplement the faltering state distribution system — have come to a virtual halt.

“The road linking Pyongyang and Sinuiju has been shut down. It’s been hard to get through to partners in the North by phone,” a Chinese businessman told the independent daily in Dandong, across the border river from Sinuiju.

…

A North Korean central bank official has been quoted by a pro-Pyongyang newspaper as saying the aim is to weaken the role of free markets and strengthen the socialist system.

Amid reports that some frustrated residents have been torching old bills, South Korean aid group Good Friends said authorities have threatened severe punishment for such an action.

Many residents would burn worthless old bills rather than surrender them to authorities, in order to avoid arousing suspicions about how they made the money, Good Friends said.

The banknotes carry portraits of founding president Kim Il-Sung and his successor and son Kim Jong-Il. Defacing their images is treated as a felony.

 UPDATE 13: Wall Street Journal  offers map of public discontent.

UPDATE 12: Entrepreneurship in China:  “Beijing markets offer counterfeit old N. Korean notes” (Kyodo).

UPDATE 11: Normally currency revlauations are coupled with institutional and organizational reforms to the monetary and public finance systems so that the public will have confidence that the new currency will maintain its value.  This is how inflation is defeated.  The DPRK has not announced any reforms of either the monetary or fiscal systems–in fact they did not even announce the currency conversion–so in addition to people losing their savings they have no expectations that the new currency will retian its value…so of course we will get instant inflation once again and probably worse than the original rate.  According to Bloomberg:

The North Korean won has plummeted 96 percent against the dollar after the government revalued the currency last week, according to reports by Yonhap News Agency and a South Korean aid group.

A North Korean bank in Sinuiju, near the border with China, offered to buy dollars for 35 won on Dec. 7, Good Friends, a Seoul-based rights group, said today on its Web site. Before the currency revaluation, the official rate was about 140 won, and as much as 3,500 won in the black market, Yonhap said.

…

Following the revaluation, rice prices have more than doubled, Good Friends said. One kilogram (2.2 pounds) of rice cost 50 won as of Dec. 5, compared with 16 won to 17 won on Dec. 2, the group, which obtains information through contacts within North Korea, said in its newsletter yesterday.

One in four school children were absent due to hunger on Dec. 3, indicating how widespread the struggle to find food had become, the group said, without saying how it derived the number.

Caveat Emptor on Good Friends reports. An alternate report claimed that school was ended early to prevent the spread of H1N1.

UPDATE 10: Institute For Far Eastern Studies (IFES)   (NK Brief No.09-12-4-1) 

At 8:00 A.M. on December 2, North Korea began transferring to a new currency throughout the country. According to Daily NK, the order to exchange currency was issued without explanation, as each regional branch of the Korea Central Bank began exchanging notes from 8:00 in the morning. ‘Good Friends’, ‘North Korea Intellectuals Solidarity’, and other defector organizations are reporting that the North is in the process of changing its currency.

North Korean officials first notified residents of the money swap on November 30. Citizens were advised that old notes were to be traded for new money, but there was significant resistance and locals refused, leading officials to issue a new order to exchange currency. The order stipulated that the exchange be carried out at ‘100 to 1’ and that for any family exchanging more than KPW 100,000, any additional monies are to be exchanged at a rate of 1000 to 1. Any remaining currency is to be deposited in the bank, and will be re-issued in new notes at a later date.

If anyone actually has as much as a million won in cash, they would be able to transfer the first hundred thousand into one thousand won of the new currency, and the next hundred thousand would be worth a mere 100 won. The remaining 800 thousand won of savings would have to be turned over to the bank on the promise that it would be accessible at some time in the future at an exchange rate that has not yet been determined. This has been met with considerable controversy within North Korean society.

On November 3, 1992, as the North went through a currency reform, old money was exchanged for new on a 1-to-1 basis, and on a standard of 300 won-per-family. Up to 200 thousand won could be deposited as savings in a local bank, but one month later it was announced that each family could withdraw no more than four thousand won in any three-month period. At the time, when banks failed to return savings to the people, many became disheartened. Markets closed and stalls were shuttered as growing numbers of people became worried that they would be unable to exchange their money for U.S. dollars or Chinese yuan.

Currency traders in Pyongsong markets, which are at the heart of North Korea’s manufacturing distribution network, were reduced to tears. Shoppers stayed at home and business travelers suddenly stopped coming. Rice traders were selling 1 kilogram for 2,200 won at the end of last month, but are now asking as much as 30,000 won (of the old currency). This means prices jumped to almost 13 times as much as they were just three days before the currency swap announcement. Currently, all of the North’s security forces are deployed to restrain the people, and not only have the Peoples’ Security Forces and the National Security Department been put on alert, but even the military has been put on emergency status. A 10:00 P.M. curfew is being enforced, and it has been announced that violators will be dealt with strictly.

With this currency exchange, the North’s middle-class is expected to suffer considerably. This is because the poorest have no savings, and the richest hold dollars or yuan. Food sellers are expected to suffer the most, since food sales across the country are carried out in cash.

UPDATE 9:  Although Good Friends reports have a reputation of being hit and miss, here is their report on the DPRK’s currency conversion.  The usual caveats apply.

UPDATE 8: Here is an English translation of an interview with the head of the North Korean Central Bank (PDF).  I got the interview here. (h/t Adam Cathcart)

UPDATE 7: The Choson Ilbo points out that monetary revaluation has been an on-and-off policy goal of the North Kroean government since 2002:

The large-denomination bills, such as those worth 5,000 and 2,000 won, bear the stamp “2008” on the upper left. Images of the 500, 200, 100, 50, 10 and 5 won bills and those on the back of 1 won, and 50, 10, 5 and 1 jeon coins bear the stamp “2002.”

“It seems that the North printed the new bills and coins in 2002 when it implemented the July 1 economic reform plan, where it introduced a modicum of market capitalism, but decided not to circulate the new currency that year apparently due to runaway inflation,” a source said. “And the North again apparently prepared for currency reform in 2008 by printing new large-denomination bills but postponed the reform because leader Kim Jong-il had a stroke.”

UPDATE 6: The rules continue to change.  According to the Daily NK:

“The maximum amount per household which could be exchanged in cash was initially set at 100,000 won, but overnight it increased to 150,000 won, then subsequently a new decree was handed down.”

“According to the new decree, the exchange rate is still 100:1 for 100,000 won, but now the authorities will only permit people to exchange the rest of the money at 1,000:1.”

As a result, if you take 200,000 won in cash to a bank, you get 1,100 won in new denomination bills. This emergency formula will do nothing other than destroy the fortunes of the people.

Another source reported that in the jangmadang practical trading had ceased, although rice was still on sale from traders dealing in the product from home. The price of a kilogram has apparently skyrocketed to 30,000 won in old denomination bills, a 15-fold increase.

Wealthy merchants generally do their business in Yuan or U.S. Dollars, so the harm to them is not so serious. At the other end of the scale, low end traders who live from day to day will not be hit too hard for the simple reason that they don’t have much cash.

However, people in the middle classes who have tended to hoard paper cash at home are facing a fatal beating.

UPDATE 5: The Daily NK and Yonhap have pictures of the new currency.

UPDATE 4:  According to the Daily NK:

In the three days since the start of the exchange, the authorities have changed the policy a number of times. First they planned to allow each household to exchange 100,000 won; 1,000 won in new denominations. Then they changed it to 150,000 won. Then they changed it again to 100,000 won, plus 50,000 won more per family member in a family of four. That is, a standard household can now exchange a maximum of 300,000 won.

Additionally, the authorities announced an extra new decree whereby one could put the rest of one’s money, which cannot be exchanged into new bills, in the bank.

This near continuous flow of policy amendments has exacerbated public confusion.

Regarding excess monies above the limit for direct exchange, the authorities originally proclaimed that people could exchange it at a 1000:1 rate, but several hours later on the same day, revised it to people being able to deposit 200,000 won in the bank at the 1000:1 rate. However, on the morning of the 3rd, the authorities implied that the state would allow the people to deposit as much as they have, saying, “The whole deposited amount will be dealt with appropriately by the state.”

Naturally, residents do not really believe in what the authorities say because they had a similar experience in 1992; the people deposited 20,000 won, but the banks gave only 4,000 won back the next year.

UPDATE 3: Marcus Noland hits the nail on the head.  He writes in the Wall Street Journal:

North Korea announced a surprise currency reform this week. The move isn’t about good economics, however; it is yet another stratagem by the central authorities to short-circuit the development of an entrepreneurial class independent of the state.

Currency reforms are not a bad thing in principle. Stable governments historically have used this tactic to draw a line under bad economic policies of the past, often after taming a hyperinflation. Good reforms typically involve knocking zeros off the old paper and issuing new currency, perhaps at approximate parity to major currencies such as the dollar or the euro to make it easier for citizens to hold their government accountable for macroeconomic performance. In recent years Turkey and Ghana, among others, have successfully implemented such reforms.

What occurred Monday in North Korea is different. Unlike a Turkish or Ghanaian-style reform, in which all citizens are encouraged to convert all their holdings of the old currency, the North Korean regime limits the amount of currency that can be converted. This renders excess holdings worthless, and has set off the frenzy this week to get out of old won and into anything else—dollars, Chinese yuan, physical goods—that will maintain value. Any economic “reform” also creates opportunities to parcel out benefits, as with a 2002 price and wage reform that favored the military.

This move is part of Pyongyang’s broader effort to curtail the rise of market activities and the development of pathways to wealth—and potentially power—beyond state control. Participants in North Korea’s bootstrap capitalism include everyone from laid-off factory workers to government officials who exploit their inside knowledge to deal privately in everything from grain to imported Chinese consumer goods.

In a society so highly atomized by the government, a private-sector market would be one of the few ways for North Koreans to interact with each other away from the state’s watchful eyes. So it stands to reason the regime would be worried about the market quite apart from any subversion of the state’s own economic machinery. Roughly every decade since the founding of the country in 1948, the government has initiated a currency reform or similar policy to confiscate the savings and working capital of private entrepreneurs.

There appear to be several particular spurs for the latest “reform.” North Korea relies on local production for about two-thirds of grain consumption, with most of the rest coming through aid. The recent harvest was reportedly poor and world grain prices are rising. This makes farmers more likely to divert food from government procurement to the black market. United Nations sanctions also are disrupting the country’s finances, affecting everyone and reducing the supply of luxury goods the regime dispenses as favors to supporters.

…

The upshot is that, despite both the currency reform and the legal crack-down on the private economy, the regime is not succeeding in stamping out the market entirely. The fact that Pyongyang has to keep trying indicates that North Koreans keep trying even harder to scrape together better lives for themselves. But the sheer ruthlessness of the Pyongyang regime and its extraordinary capacity for repression underline just what an uphill battle those North Koreans face against a regime determined to keep them down.

Also here are some more details from the Choson Ilbo:

Sources in North Korea say people have been told that money above the individual exchange limit must be deposited in banks, but the state also limits individual deposits to between 300,000 to 3 million won, and people are not allowed to freely withdraw money from their accounts. This has apparently stoked tremendous anger.

During the last currency reform in 1992, authorities permitted each person to deposit up to 20,000 won in the bank, but they were later allowed to withdraw only a few thousand won. Many were unable to withdraw any money at all.

Read previous posts on this topic below:
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UPDATE: The South Korean government is showing no eagerness to resume tours to Kumgnagsan.  Its list of conditions for doing so are listed below in the original post.  The last item in the list (The DPRK needs to provide more transparency about how it spends the money it receives from the Kumgang resort) seems to be the most important to the South Korean government at this point.  According to the Joong Ang Daily:

While it appears intent on improving inter-Korean ties at Kaesong, Seoul is in no hurry to resume suspended tourism to the North’s Mount Kumgang. The South Korean government for the first time tied the Mount Kumgang tours to international sanctions, saying providing cash payments for the program would run counter to an existing United Nations Security Council resolution.

Speaking to reporters late Wednesday, a high-ranking Unification Ministry official said Seoul was reviewing the possibility of replacing cash with goods to pay North Korea for tours to Kumgang. “The issue of compensating the North for the tourism is related to UN Security Council Resolution 1874,” the official said.

He was referring to the resolution adopted in June, following North Korea’s second nuclear test in late May. The resolution states that member states must not provide financial assistance to North Korea, except for “humanitarian and developmental purposes directly addressing civilian needs.” The resolution also says that UN members must not provide “public financial support” for North Korea where such aid “could contribute to the country’s nuclear-related or ballistic missile-related or other [weapons of mass destruction]-related programs or activities.”

The Kumgang tours have been suspended since July of last year after a female South Korean tourist was fatally shot by a North Korean soldier in a nearby restricted zone. Last week, the North sent a message through Hyundai Group, the South Korean operator of the tours, that it wanted to talk to the South about the resumption of the tours, but Seoul has been lukewarm to the overture. The Mount Kumgang tour had been regarded as a major cash cow for North Korea. Since it is difficult to verify the use of cash in the North, the question of the program’s possible violation of the resolution has been raised in the past.

When the North made the proposal through Hyundai, one government official said he was “none too pleased” with the North because it could have sent its message through official channels.

I expressed some skepticism for “alternative payment mechanisms” below.

ORIGINAL POST: The South Korean government does not plan to allow South Korean tourists to return to Mt. Kumgang until the DPRK:

1. Cooperates in an investigation of the shooting of a South Korean tourist last year.

2. Implements measures to prevent a recurrence.

3. Guarantees tourist safety.

Recently, however, the South Korean government added another item to the list:

4. The DPRK needs to provide more transparency about how it spends the money it receives from the Kumgang resort.

According to the Hankyoreh:

The government’s attitude is in line with a statement given by President Lee Myung-bak in an interview with European news channel EuroNews on July 7, in which he namely said that there are suspicions that the massive aid given to North Korea over the last decade had been used to develop nuclear weapons. A government official said they were unable to block all of the cash entering North Korea from tourists spending money at Mt. Kumgang, but the government has concluded that at least the tourism fees should be transparent. Up until the project was suspended last July, Hyundai Asan, the company that operates the Mt. Kumgang tourism project, had sent North Korea 30 dollars per person for same-day tours, 48 dollars for two-day, one-night tours and 80 dollars for three-day, two-night tours. In total, Hyundai Asan had given North Korea an estimated 15 million dollars per year.

How can they achieve “transparency”? The Hankyoreh reports on a couple of ideas:

1. Pay North Korea in goods such as grain or sugar.

2. Open up an escrow account for North Korea that would limit the DPRK government to transferring money only for the import of specific non-military-use items.

I am skeptical that these latter two ideas could accomplish their goal.  If South Korea paid the DPRK in goods (food, fertilizer, equipment), these could simply be resold to China for cash–as previous aid has been.

If South Korea set up an escrow account for the North Korean government which would be restricted somehow, such as prohibitions on the purchase of dual-use technologies, (would I be too cynical to predict that funds in the account would be limited to purchases of goods made in South Korea?) not much changes from the example above–although now there is a greater opportunity for the DPRK to engage in strategic arbitrage.  If I was the DPRK official in charge of the escrow account, I would look for price differences in commodities and capital between South Korea and China.  When I saw a price differential, I would buy the cheap goods in South Korea using the escrow funds and sell them for a profit in China. This could potentially net the DPRK more money than the previous policy proposal, but it does bring the DPRK one step closer to trading futures contracts!

Even if the DPRK did not get into the arbitrage game, there is no getting around fungibility.  For example, if the DPRK spent the entire escrow account on food, it could  steer domestic resources towards more profitable exports and get the cash that way.

Either way, most of the money goes where the leadership wants it to go.

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-10-7-1
10/7/2009

The March 2009 issue of the North Korean Journal Economic Research emphasized that with the strengthening of international economic sanctions against the North, actively participating in the “Battle for Savings” was essential in all sectors in order to construct a “strong and prosperous nation.”

The recently obtained academic journal called on readers to broaden the “savings battle” in an article titled, “Strongly Spreading the Battle for Savings Is an Important Measure for the Construction of an Economically Strong Socialist Nation.” The article stressed that the “savings battle” was necessary for the successful completion of large-scale industrial construction projects, such as the Huicheon Power Plant, as well as the construction of hundreds of thousands of private homes and pubic facilities. North Korean authorities consider these projects essential to the successful construction of a ‘strong and prosperous nation’ by 2012, the year marking the 100th anniversary of the birth of the late Kim Il Sung.

The journal reported that Kim Jong Il had ordered, “Instances of waste among workers and laborers is to be eliminated and the Battle for Savings strengthened.” It also offered, “The ‘Battle for Savings’ is one of the conditions necessary to be able to overcome the economic difficulties created by the Imperialists’ sanctions.”

The journal accused the United States of “villainously daring to carry out military pillaging and economic sanctioning measures” in order to blockade the North and reported that “American and Japanese Imperialists are not only sanctioning imported and exported goods, but are going as far as to interfere with loan accounts.” These statements may provide some insight into the economic and social difficulties the international sanctions are causing for North Korea.

The article went on to say that these circumstances demand that all people “Raise the revolutionary spirit of self-reliance and strenuous efforts while strengthening to new heights of the savings battle throughout all sectors of the People’s Economy.”

Furthermore, it stated that if the “Battle for Savings,” was strengthened, “The capital saved could increase the number, quality and variety of products, increasing the export base,” and, “foreign capital can be saved by closely managing and efficiently using materials which must be imported, such as crude petroleum and some raw materials and equipment.”

The article also evaluated the implementation of savings plans in factories and enterprises, stating, “Pilot projects to increase production need to be expanded through schemes such as prizes and money for saving of raw materials and increasing output by introducing overtime pay schedules.”

PSA Cracks Down on Loan Sharks
Daily NK
Jung Kwon Ho
9/20/2009

North Korea’s police, the People’s Safety Agency (PSA), have launched a special investigation into the behavior of loan sharks, or “usurers,” in light of the high numbers of people taking out high interest loans but being unable to keep up repayments and ending up as “kotjebi.”

A source from Shinuiju told Daily NK on Friday, “A decree declaring all-out war against predatory usurers has been handed down to the provincial People’s Safety Agency. They are investigating Korean-Chinese traders and North Koreans repatriated from Japan.”

Loan sharks in North Korea are generally Korean-Chinese with relatives in China or those who have returned from Japan but whose relatives remain there.

The story was confirmed by a source from Hoiryeong in North Hamkyung Province. The source explained to Daily NK on Thursday, “The People’s Safety Agency issued a decree exposing the usury, and conveyed it to every office of the provincial and municipal National Security Agency (NSA) and the PSA. Thereafter, NSA officials attended People’s Unit meetings and gave lectures about harshly sanctioning the practice of earning money through high interest loans.”

According to the Hoiryeong source, the decree, “Map out measures to uproot usury,” was delivered to all NSA officials on September 2.

The decree apparently says, “Although national measures have been adopted to root out usury, this social phenomenon has not been eradicated.”

The Shinuiju source said that the authorities’ new hard-line has come about because the numbers of people who are being turned into “kotjebi” by these predatory loans is increasing.

He noted, “Since 2000, new kotjebi have been people who have gone to ruin and lost their homes to loan sharks. These days their numbers are drastically increasing, so the authorities cannot stand by indifferently.”

According to one source, a Korean-Chinese loan shark called Cho Jung Cheol was recently caught by the PSA on suspicion of taking a total of seven houses from defaulters.

North Korean people usually offer their house as security on a loan. Cho lent money at 30% interest for two weeks to a month, and used gangsters to take houses from those who couldn’t pay.

Those who lose their houses in this way roam the streets with their family members, the family splits up, or sometimes they escape from North Korea. After 2005, this became a common social phenomenon.

The loan sharks have other unethical ways to turn a profit, “Some of these loan sharks hoard up food during the harvest season and earn undue profits from selling it in the difficult spring season,” the source explained.

Sources all agreed that the people unanimously welcome the authorities’ measures.

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-9-4-1
9/4/2009

The latest issue of the Kim Il Sung University newspaper (2009, no. 2, April) acknowledged the international society’s sanctions against North Korea, and in a bid to encourage a self-determinant resolution to the country’s economic problems, the paper called for “the utmost circulation of dormant cash,” emphasizing the role of the bank.

The paper stressed that strengthening the role of the bank was a crucial part of ensuring the country’s socialist system continued to operate. It also stated that elevating the position of the bank and circulating currency were essential elements of ensuring that North Koreans were not reliant on foreign assistance, and that they were able to solve their problems independently.

In the article encouraging currency circulation, it was stated that “the oppressive isolation policy of the imperialists grows worse every day,” but that by maximizing capital circulation, domestic economic problems could be resolved and the North could complete its bid to create an economically strong nation even more quickly.

The article reflects the DPRK government’s attempt to encourage spending of Won, Dollars, and Euros by institutions, enterprises and even individuals in an attempt to ease economic woes even in the face of international sanctions. Jung Yeon-ho, a researcher with the Korea Development Institute (KDI), reported in 2003 that North Koreans were sitting on as much as 600,000-1,000,000 USD. Since 2003, North Korean authorities have been trading US dollars for Euros due to sanctions from Washington, so now many in the North also have considerable amounts of Euros stashed away, as well.

Kim Il Sung University, through its paper, insisted that banks needed to strengthen their role in currency circulation and lending, and to ensure that their services were in line with the demands of the times. It noted that banks were taking note of the needs of individuals and enterprises, and catering to their demands in order to more appropriately respond to their issues and not only meet their needs, but to encourage their continued use.

Some North Koreans have had bad experiences with banks, not being able to withdraw previously deposited funds or not earning expected interest. This has led some to avoid banks in order to guarantee their savings.

After the North’s July 1st (2002) Economic Management Reform Measure, an attempt to make policy reflect reality in the North, the government began selling 10-year ‘People’s Lifestyle Bonds’. In early 2006, North Korea’s banks began offering savings accounts, loans, and other services to individuals and enterprises in order to encourage spending.

According to the Dow Jones Newswire:

The U.S. Treasury Department Tuesday announced sanctions on the Korea Kwangson Banking Corp., a bank the department says is tied to North Korea’s nuclear and weapons trade.

Treasury alleges that North Korea used the Korea Kwangson Banking Corp., or KKBC, to hide nuclear proliferation activities.

The department accuses the bank of providing financial support to Tanchon Commercial Bank and a unit of the Korea Ryonbong General Corp., both of which have already been identified by the U.S. government as weapons of mass destruction proliferators.

“North Korea’s use of a little-known bank, KKBC, to mask the international financial business of sanctioned proliferators demonstrates the lengths to which the regime will go to continue its proliferation activities and the high risk that any business with North Korea may well be illicit,” Treasury Under Secretary for Terrorism and Financial Intelligence Stuart Levey said in a statement.

According to the Associated Press:

The sanctions mean bank accounts or other financial assets found in the United States that belong to the firm are blocked. Americans also are prohibited from doing business with the bank. It is based in North Korea and has operated at least one overseas branch in Dandong, China.

Further information:
1. Here is an earlier post that contains information on other sanctions imposed this year.

2. Aside from the US and UN, China has also “sanctioned” the DPRK this year.  See here and here.  No doubt they will react to the Dandong branch of KKBC as well. 

3. Stephan Haggard Marcus Noland call these kinds of actions “Whac-a-Mole.” Read their analysis here. 

4. Joshua notes that this company was one of the North Korean banks listed in Treasury/OFAC’s June 18th advisory about North Korean financial institutions engaging in money laundering activities.

The US Congressional Research Service has updated their report on the DPRK’s alleged counterfeiting operations. You may download the report here.

Here is the summary:

The United States has accused the Democratic People’s Republic of Korea (DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes (Supernotes) and passing them off in various countries, although there is some doubt by observers and other governments that the DPRK is capable of creating Supernotes of the quality found. What has been confirmed is that the DPRK has passed off such bills in various countries and that the counterfeit bills circulate both within North Korea and around its border with China. Defectors from North Korea also have provided information on Pyongyang’s counterfeiting operation, although those statements have not been corroborated. Whether the DPRK is responsible for the actual production or not, trafficking in counterfeit has been one of several illicit activities by North Korea apparently done to generate foreign exchange that is used to purchase imports or finance government activities abroad.

Although Pyongyang denies complicity in any counterfeiting operation, at least $45 million in such Supernotes thought to be of North Korean origin have been detected in circulation, and estimates are that the country has earned from $15 to $25 million per year over several years from counterfeiting. The illegal nature of any counterfeiting activity makes open-source information on the scope and scale of DPRK counterfeiting and distribution operations incomplete. South Korean intelligence has corroborated information on North Korean production of forged currency prior to 1998, and certain individuals have been indicted in U.S. courts for distributing such forged currency. Media reports in January 2006 state that Chinese investigators had independently confirmed allegations of DPRK counterfeiting. In June 2009, press reports claimed that the DPRK produced counterfeit U.S. bills even after 2007.

For the United States, the alleged North Korean counterfeiting represents a direct attack on a protected U.S. national asset and may provide a rationale to impose financial sanctions on the DPRK. The earnings from counterfeiting and related activities also could be important to Pyongyang’s finances. Profits from any counterfeiting also may be laundered through banks or other financial institutions.

U.S. policy toward the alleged counterfeiting is split between law enforcement efforts and political and diplomatic pressures. On the law enforcement side, individuals have been  indicted and the Banco Delta Asia (BDA) bank in Macao (a territory of China) was named as a primary money laundering concern under the Patriot Act. In June 2007, the BDA issue was resolved and the Six-Party Talks resumed. At the time, Pyongyang promised that it would punish the counterfeiters and destroy their equipment. The law enforcement effort has become entwined with diplomatic efforts and pressures to resolve the North Korean nuclear and missile issues. Following North Korea’s second nuclear test and several missile launches in May 2009, the United States reportedly has been considering further financial sanctions on the DPRK based partly on its alleged counterfeiting.

This report as well as many other CRS reports on the DPRK can be found here.