Archive for the ‘Fiscal & monetary policy’ Category

US Treasury “311s” North Korea

Thursday, June 2nd, 2016

Here is the statement from the Treasury Department:

Treasury Takes Actions To Further Restrict North Korea’s Access to The U.S. Financial System

6/1/2016

Action Responds to the Threat that North Korea Poses to the Global Financial System; the United States Calls on International Partners to Similarly Takes Steps toward Severing Banking Relationships with the Dangerous Regime

WASHINGTON – Today, the U.S. Department of the Treasury announced a Notice of Finding that the Democratic People’s Republic of Korea (North Korea) is a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act. Treasury, through its Financial Crimes Enforcement Network (FinCEN), also released a notice of proposed rulemaking (NPRM) recommending a special measure to further isolate North Korea from the international financial system by prohibiting covered U.S. financial institutions from opening or maintaining correspondent accounts with North Korean financial institutions, and prohibiting the use of U.S. correspondent accounts to process transactions for North Korean financial institutions.

Section 311 gives the Secretary of the Treasury the authority to identify a foreign jurisdiction to be a primary money laundering concern. Once identified, the Secretary can require U.S. financial institutions to take appropriate countermeasures. The special measure proposed in today’s NPRM would impose the most significant measure available to the Secretary under Section 311.

“The United States, the UN Security Council, and our partners worldwide remain clear-eyed about the significant threat that North Korea poses to the global financial system. The regime is notoriously deceitful in its financial transactions in order to continue its illicit weapons programs and other destabilizing activities,” said Adam J. Szubin, Acting Under Secretary for Terrorism and Financial Intelligence. “Today’s action is a further step toward severing banking relationships with North Korea and we expect all governments and financial authorities to do likewise pursuant to the new UN Security Council Resolution. It is essential that we all take action to prevent the regime from abusing financial institutions around the world – through their own accounts or other means.”

Reasons for This 311 Determination

Treasury is taking this action consistent with the North Korea Sanctions and Policy Enhancement Act, enacted on February 18, 2016, which requires Treasury to determine within 180 days whether reasonable grounds exist for concluding that North Korea is a jurisdiction of primary money laundering concern, and if so, to propose one or more special measures. In addition, the United Nations Security Council adopted Resolution 2270 on March 2, 2016, which in part requires UN Member States to sever correspondent banking relationships with North Korean financial institutions within 90 days of the adoption of the resolution.

North Korea is proposed for action under Section 311 because (1) North Korea uses state-controlled financial institutions and front companies to conduct international financial transactions that support the proliferation and development of WMD and ballistic missiles; (2) North Korea is subject to little or no bank supervision anti-money laundering or combating the financing of terrorism (“AML/CFT”) controls; (3) North Korea has no diplomatic relationship, and thus no mutual legal assistance treaty, with the United States and does not cooperate with U.S. law enforcement and regulatory officials in obtaining information about transactions originating in or routed through or to North Korea; and (4) North Korea relies on the illicit and corrupt activity of high-level officials to support its government.

Impact of the 311 Notice of Finding and the NPRM Special Measure

While current U.S. law already generally prohibits U.S. financial institutions from engaging in both direct and indirect transactions with North Korean financial institutions, this NPRM, if finalized, would require U.S. financial institutions to implement additional due diligence measures in order to prevent North Korean banking institutions from gaining improper indirect access to U.S. correspondent accounts. While North Korea’s financial institutions do not maintain correspondent accounts with U.S. financial institutions, North Korean financial institutions frequently conduct transactions on behalf of the North Korean government and state-controlled corporations. The NPRM, if finalized, would prohibit the use of third-country banks’ U.S. correspondent accounts to process transactions for North Korean financial institutions.

Italics added for emphasis.

The “Notice of Finding” is here, and is also worth reading.

According to the Wall Street Journal:

Treasury Department officials said they are moving to ban non-U.S. banks and entities from processing dollar transactions on behalf of North Korea, an arrangement known as a U-turn, in a move to block its international trade.

China is by far Pyongyang’s largest trading partner, and Chinese firms could be caught in the crosshairs, according to current and former U.S. officials.

Zhu Haiquan, the spokesman for China’s embassy in Washington, repeated Beijing’s warnings against what it considers “unilateral sanctions taken by any country.”

He added that “we should avoid any move that may further aggravate tensions” on the Korean peninsula, and said “the unilateral sanctions must not affect and harm the legitimate rights and interests of China.”

U.S. officials were pleased that China agreed in March to support the new U.N. sanctions, which could significantly impair North Korea’s ability to generate hard currency and ship its exports.

Still, U.S. officials have voiced skepticism that Beijing would significantly punish Pyongyang, a longtime ally. China has rebuked North Korea in the past for its nuclear and missile tests, only to increase investment and trade with the country.

The issue is likely to be among the topics discussed when Messrs. Kerry and Lew meet top Chinese officials in Beijing for the Strategic and Economic Dialogue, a series of annual bilateral meetings.

According to the New York Times:

As a practical matter, that would largely affect Chinese banks, which facilitate North Korea’s financial transactions with Beijing, its largest trading partner. It could also affect some institutions in the nominally autonomous Chinese regions of Macau and Hong Kong, as well as in Singapore, where Pyongyang has often gone to hide the true nature of its banking activities, and to pay for missiles, nuclear fuel and the huge infrastructure it has built around those programs.

It is hard to assess how much the action will hurt North Korea. Such sanctions against financial institutions doing business with Iran proved effective because Tehran had billions of dollars in monthly oil and other energy exports that could be choked off; North Korea has none. Oftentimes Pyongyang deals in cash. Until a few years ago it was one of the largest counterfeiters of $100 bills. But that once-lucrative fraud was largely cut off by the redesign of the $100 bill.

Banks in the United States are already prohibited from doing business with financial institutions in North Korea. But the recommended rules would require them to perform additional due diligence to ensure they are not inadvertently transacting with North Korean financial institutions or the Pyongyang government through shell companies or other fictitious entities.

Notice of the new rules has been published by the Federal Register. Feel free to comment if you like.

Josh also writes a walk-through of how this works.

Here is information from Choson Exchange.

Troy Stangarone writes about the sanctions for KEI.

The UK also strengthened financial sanctions against the DPRK.

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New Party Central Auditing Commission inaugurated

Wednesday, May 11th, 2016

New-central-auditing-commission

According to the Pyongyang Times (2016-5-10):

The First Plenary Session of the 7th Central Auditing Commission of the Workers’ Party of Korea was held on May 9.

The event was attended by the members of the Party Central Auditing Commission who have been elected at the Seventh WPK Congress.

There was an election of the chairman and vice-chairman of the Party Central Auditing Commission.

Choe Sung Ho was elected chairman with Pak Myong Sun as his deputy.

According to the Ministry of Unification, the Party Central Auditing Commission, as its name suggests, inspects the party’s financial management.

This is interesting because this story originated in KCNA, though no pictures were released. However, the KCNA story was picked up by the Pyongyang Times, and this second version does contain pictures indicating that Kim Jong-un ran the meeting (See pictures at the top), even though he is not mentioned in the text of the article.

I am not sure of the meeting room location or where the Auditing Commission is physically located, but the meeting did not take place in Conference Hall No. 1 next to the Central Committee Building, Kim Jong-un’s official office.

Kim’s meeting at the Auditing Commission has not been reported in the Rodong Sinmun, the KWP newspaper, to the best of my knowledge.

The cheap and fast analysis suggests that as this is Kim Jong-un’s first committee meeting following the party congress, he is making a priority of understanding/controlling party finances in an effort to be a more assertive party leader (he was just named party chairman after all). Following a thorough party audit, Kim will be in a better position to allocate party financial rents to key supporters as well as to critically engage other cadres over party operations.

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9th Plenary Meeting of 13th SPA Presidium Held

Wednesday, March 30th, 2016

According to KCNA (2016-3-30):

The 9th plenary meeting of the 13th Presidium of the Supreme People’s Assembly (SPA) of the DPRK took place at the Mansudae Assembly Hall Wednesday.

The plenary meeting was attended by members of the SPA Presidium.

Officials concerned were present there as observers.

Discussed at the meeting were review of the implementation of the state budget for Juche 104 (2015) of the DPRK and the state budget for Juche 105 (2016).

A report was made at the meeting.

According to the report, the state budget for last year was correctly carried out.

The plan for state budgetary revenue was over-fulfilled 1.3 percent or an increase of 5 percent over the previous year.

The plan for local budgetary revenue was fulfilled at 113.8 percent while that for state budgetary expenditure was carried out at 99.9 percent.

15.9 percent of the total expenditure was allocated for national defence while 47.5 percent for building an economic power and the improvement of the standard of people’s living.

Investment in the fields of science and technology showed a 4.7 percent increase over that last year.

36.6 percent of the total expenditure was earmarked for cultural construction including education, public health, sports and literature and arts.

The state budgetary revenue for this year is expected to go up 4.1 percent out of which transaction revenue will hold 3.3 percent, the revenue from the profits of state enterprises 4.5 percent, the revenue from the profits of cooperative enterprises 1.5 percent, that from real estate rent 4 percent, that from social insurance 1.1 percent, that from the sale of properties and price difference 2.5 percent and other revenue 1.3 percent. The revenue from economic trade zone is expected to grow 4.1 percent.

Out of the state budgetary revenue the national budgetary revenue will account for 76.8 percent while that from local areas 23.2 percent.

The state budgetary expenditure is expected to go up 5.6 percent over last year out of which 4.8 percent will go to industries, 4.3 percent to agriculture, 6.9 percent to fisheries, 13.7 percent to capital construction and 7.5 percent to forestry.

It was decided to increase expenditure in the field of science and technology 5.2 percent, the field of education 8.1 percent, the field of public health 3.8 percent, the field of sports 4.1 percent and the field of culture 7.4 percent.

15.8 percent of the total expenditure will be spent for national defence.

A large amount of educational aid fund and stipends will be sent for the education of Korean children in Japan.

A decision of the Presidium of the SPA “On approving the review of the fulfillment of the Juche 104 (2015) state budget of the DPRK” and a decree of the Presidium of the SPA “On the Juche 105 (2016) state budget of the DPRK” were adopted at the meeting.

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North Korean market condition since new international sanctions

Wednesday, March 23rd, 2016

Institute for Far Eastern Studies (IFES)

It has been almost two weeks since the enforcement of new sanctions imposed by the United Nations Security Council (UNSC), and so far North Korea’s domestic economy seems calm. Following the sanctions, North Korea has been preparing for the 7th Party Congress in May with its 70-day campaign (or ‘speed battle’). In order for the people to focus on the preparation, the government has reduced the business hours of markets and has begun controlling the street markets (i.e., ‘grasshopper’ markets).

In particular, it was expected that the sanctions would reduce the inflow of goods into the country which would then lead to a rapid rise in market prices and exchange rates, but so far the market prices appear to have remained relatively stable. According to the Daily NK, a South Korean online newspaper reporting on North Korea, 1kg of rice is selling for 5,100 KPW, 5,150 KPW, and 5,080 KPW in Pyongyang, Sinuiju, and Hyesan, respectively. These prices are relatively similar to the prices prior to when the sanctions were in full effect (i.e., 5,100 KPW in Pyongyang and Sinuiju, and 5,260 KPW in Hyesan).

The exchange rate appears no different. One US dollar exchanges for 8,150 KPW in Pyongyang, 8,200 KPW in Sinuiju, and 8,170 KPW in Hyesan. The rate has been only slightly reduced compared to the rate prior to when the sanctions were put in place (i.e., 8,200 KPW in Pyongyang, and 8,290 KPW in Sinuiju, and Hyesan).

The reason for the stability in the market and the exchange rate is because even though the market hours have been reduced due to the 70-day campaign, the markets actually are running better than before and in some regions the price has gone down for some goods, presumably because some of these items that were exported in large scale via China have been circulated in the North Korean domestic market.

Also, aside from the underground resources (i.e., minerals) — the sanctioned items that used to account for most of the exports — other goods are still sold accordingly, which helps in stabilizing the market. Furthermore, the improvement of the domestic market cannot be taken lightly when considering the stability of the markets. In other words, unless markets are completely closed, people in North Korea wouldn’t consider it an issue.

Meanwhile, despite the international community’s sanctions against the country, including that of the UN Security Council, North Korea is claiming overproduction in areas such as electrical power and minerals in the run-up to the Seventh Party Congress in May. The North Korean propaganda media ‘DPRK Today’ has mentioned about production and the country’s success in confronting the imposed sanctions.

More specifically, since the initiation of the 70-day campaign last month (February 23rd), in order to boost economic success, Namhung Youth Chemical Complex has reportedly turned out 60% more fertilizer; Pyongyang Railway Bureau increased the traffic by 40%; Ryongyang Mine increased its production of magnesite by 20%; and 2.8 Jiktong Youth Coal Mine produced 7,200t beyond its quota. In addition, Kim Jong Suk Textile Mill reportedly has seen more than 40 labors complete the plan for the first half of the year, while Baekdu Hero’s Youth Power Plant has reached 37,000m2 in dam construction. Previously on March 3rd, the Korean Central Broadcasting radio reported that many of the production targets for February in the national economy have been surpassed.

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DPRK to officially reintroduce taxation?

Tuesday, March 15th, 2016

Choson Exchange points out this article in the Joongang Ilbo which makes an interesting claim (if true):

North Korean leader Kim Jong-un is pushing for a plan to officially introduce a tax system for the first time in 42 years. The Communist state has not had a such a system since 1974, when it was abolished by the Supreme People’s Assembly.

According to a source familiar with the situation inside North Korea, Pyongyang is preparing to revive the tax system ahead of the ruling Workers’ Party convention in May in response to decreasing national finances, squeezed by sanctions from the international community.

After North Korea conducted its fourth nuclear test on Jan. 6 and subsequent long-range missile launch on Feb. 7, the United Nations Security Council unanimously adopted the toughest sanctions to date in an attempt to curb cash from flowing into North Korea.

“The central government will grant economic autonomy to local merchants, in exchange for collecting bills for utilizing land, water and electricity,” the source said.

He added that the North will expand the number of private merchants and the North’s private markets, jangmadang, and officially levy taxes on usage for factories and companies.

Under the new tax system, North Korea will collect individual income tax from the emerging donju, a term assigned to the country’s nouveau riche that literally means “master of money,” who have amassed sizable wealth through the private market.

The individual income tax rate has not yet been decided, though it is likely that it will be higher than the last 1.8 percent tax rate from 1974, particularly considering the rise in merchants.

The push for a tax system was Kim Jong-un’s idea, according to experts on North Korea, who said the young leader felt uneasy about the fact that his country didn’t have a tax system when he took power.

North Korea’s abolishment of taxes in 1974 was largely a propaganda move, intended to demonstrate the country’s superiority over other nations. However, although the country did not officially have a tax system, the impoverished state still collected a number of fees from its people in place of corporate and value-added taxes.

“North Korean professors at Kim Il-sung University and other experts have recently been studying the state’s tax system,” said Lim Eul-chul, a professor of North Korean studies at Kyungnam University. “North Korea will use the term ‘usage fee’ rather than ‘tax’ as it sees the tax system as a vestige of capitalism.”

Read the full story here:
Pyongyang considers reinstating its tax system
Joongang Ilbo
Ko Soo-suk
2016-3-16

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North Korean authorities using market prices for policy

Monday, November 16th, 2015

According to the Daily NK:

The North Korean authorities officially determine product prices in North Korea. However, according to inside sources, these prices are being ignored more and more in favor of prices determined by market forces. Instead of official price designations, the authorities have posted ‘price ceilings,’ but they are not strictly enforcing them.

In a telephone conversation with the Daily NK on November 13th, a source from North Hamgyong Province said, “Official prices have almost completely disappeared from the markets. Reflecting this trend, even the market management offices located in each official marketplace are listing ‘price ceilings’ instead of official prices.”

Daily NK spoke with a source in South Hamgyong Province who confirmed this to be the case there as well.

“Furthermore, the price ceilings are being determined by the market rates, so the meaning of these regulations is fading. For example, if the going rate for rice at any given time is 5,000 KPW [0.58 USD] per kilogram, than the price ceiling would be set at something like 4,500- 5,000 KPW [0.52-0.58 USD],” she said.

“These ceiling prices are indeed posted, but they are not enforced. Ministry of People’s Safety [which act as the North’s police forces] officers are not able to command merchants to lower their prices. The atmosphere is such that if they even tried, they would likely be insulted and cursed at by the vendors.”

She added, “At the market, it has been quite some time since people realized that the official prices are meaningless. If a buyer asked a merchant for the official price of a given product, that merchant would likely to scold the buyer for not having proper control of his mental faculties.”

In a true indication that the national prices are being disregarded on a wide-scale level, even the authorities have shown signs that they are interested in understanding how market rates work.

For example, from Provincial People’s Committees, cabinet ministers are being kept abreast of the local market rate for product prices on a daily basis. “They are trying to understand the exact market prices for given quantities of goods like electronics and foodstuffs,” the source explained.

When asked to describe how ordinary North Korean folks were reacting to this news, she said, “People are saying things like, ‘The authorities explain that they want to understand rice prices so they can think of measures to improve the lives of the people, but that just makes us laugh. The best thing they can do to help is to stay out of the way.’”

Read the full story here:
Authorities tacitly recognize market-determined prices
Daily NK
Lee Sang Yong
2015-11-16

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DPRK announces new EDZ (SEZ) regulations

Sunday, November 15th, 2015

According to the Pyongyang Times:

Regulations on tax in EDZ worked out

Regulations on Tax in Economic Development Zones have been published pursuant to the August 19 decree of the Presidium of the Supreme People’s Assembly.

The regulations have 11 chapters and 72 articles.

According to them, they are applicable to foreign-invested businesses, foreign individuals and overseas Koreans that conduct business transactions or earn income in EDZs, and tax supervision in the zones will be conducted by relevant taxation institutions under the guidance of the central taxation organ.

Enterprise income tax rate is 14 per cent of the net profits, or 10 per cent in case of the priority sectors.

Tax rate on remuneration will be 5 to 30 per cent of the amount of income, if the monthly amount of income is higher than 500 euros, and that on the income from donation 2-15 per cent if the amount of income is greater than 5 000 euros.

Property tax rate is 1 per cent on buildings and 1.4 per cent on vessels and planes, and the property owner is required to submit the application for registration of property to taxation institutions within 20 days of property ownership and register the property.

Individuals who have inherited properties in EDZs and residents in EDZs who inherited properties outside EDZs are bound to pay inheritance tax and the rate is 6 to 30 per cent.

Turnover tax rate is 1-15 per cent of the sales proceeds of products or income from construction work guidance and 16 to 50 per cent in case of defined luxury articles.

Service tax rate is 1-10 per cent, and up to 50 per cent tax rate is applied to special entertainment category, but it is reduced by 50 per cent for businesses engaged in the latest science and technology service sector.

Resource tax rate varies from 1 to 20 per cent according to its kinds and it may be exempted in case the resources are exported in the form of processed products with high value based on modernized technological processes, or sold to local institutions, businesses and organizations by government measures.

It may be reduced by 50 per cent in case the businesses engaged in the special priority sector uses underground water for production.

City management tax rate is 1 per cent and businesses and individuals must pay vehicle taxes on the use of cars and other road vehicles.

Read the full story here:
Regulations on tax in EDZ worked out
Pyongyang Times
2015-11-15

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New taxes to kick in for KIC firms

Wednesday, November 4th, 2015

According to Yonhap:

South Korean firms operating in North Korea are required to pay a land use fee starting this year, officials here said Wednesday, after a decade of exemption.

The relevant authorities of the two Koreas will soon begin talks on how much more the 120 South Korean companies in the Kaesong Industrial Complex should pay, they added.

Launching the facilities in 2004, the North agreed to exempt the South from a land use fee for a decade. The measure expires this year.

“It’s a kind of tax to be paid once a year,” a Unification Ministry official said. “Thus, the North’s Central Special Development Guidance Bureau and the South’s Kaesong Industrial District Management Committee should begin consultations before long.”

The two sides recently ended months of negotiations on the level of wages for around 53,000 North Korean workers in the Kaesong zone near the inter-Korean border.

They agreed on a 5-percent increase in minimum wages from US$70.35 a month.

Read the dull story here:
S. Korea to pay ‘tax’ for Kaesong complex
Yonhap
2015-11-4

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DPRK tourism revenue estimates

Sunday, November 1st, 2015

According to Yonhap:

North Korea earned tens of millions of dollars from foreign tourists in 2014, around half of the hard currency it won from the lucrative inter-Korean industrial park, a researcher said Sunday.

North Korea’s income from foreign tourists is estimated at US$30.6 million to $43.6 million last year, considering about 95,000 Chinese tourists and 5,000 tourists from Western countries visited the country, Yoon In-ju of the Korea Maritime Institute said in a paper.

North Korea’s annual income from the Kaesong Industrial Complex in the North’s border town of Kaesong, accommodating 124 South Korean firms that employ more than 50,000 North Korean workers, reached $86 million in 2014.

North Korea has launched a drive to woo foreign tourists since leader Kim Jong-un assumed power in 2011 by introducing a variety of tour packages that give participants sports, military and labor experiences.

North Korea, however, lacks enough infrastructure, such as transportation and lodgings, to attract foreign tourists, Yoon said, adding the North’s policy of allowing only group tours and limiting tourist destinations also serve as obstacles to foreigners investing in infrastructure, as well as tourists.

I have not read the report, and have been unable to find a copy in English, but I want to highlight that there is a difference in the kind of revenue that is earn from tourism versus from the KIC.

The KIC earns $US in cash, which are delivered from the South Koreans to the North Korean government. Because South Koreans cover all the expenses in the KIC, the DPRK government’s gross take effectively equals net take (100% of proceeds). However with tourism, gross take  is not what the government actually receives. Tour operators take a cut, KITC takes a cut, guides take a cut, restaurants and hotels take a cut. Local governments take a cut. Of course how the average tourist dollar is divided up remains a mystery, but it is not anywhere near the government’s 100% share that the KIC draws.

This distinction may have been addressed in the paper, but the Yonhap report did not make that clear.

Read the full story here:
N. Korea’s income from tourism half of that from Kaesong complex
Yonhap
2015-11-1

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On recent economic developments in the DPRK

Thursday, October 29th, 2015

James Pearson writes in Reuters:

When North Korea’s late “Dear Leader” Kim Jong Il opened the Pothonggang Department Store in December 2010, he called on it to play “a big role” in improving living standards in the capital Pyongyang, official media said.

Five years later, judging by the long lines inside the three-storey store that sells everything from electronic gadgets and cosmetics, to food and household goods, the Pothonggang is meeting Kim’s expectations – at least for privileged Pyongyang residents.

But the department store also starkly illustrates the extent to which the underground market has become the new normal in isolated North Korea. And that poses a dilemma to the Kim family’s hereditary dictatorship, which up until now has kept tight control of a Soviet-style command economy, largely synonymous with rationing and material deprivation. Now that the black market has become the new normal, Kim Jong Un’s government has little choice but to continue its fledgling efforts at economic reforms that reflect market realities on the ground or risk losing its grip on power, experts say.

A Reuters reporter, allowed to roam the store with a government minder for a look at the North Korean consumer in action, noted almost all the price tags were in dollars as well as won. A Sharp TV was priced at 11.26 million won or $1,340; a water pump at 2.52 million won ($300). Beef was 76,000 won ($8.60) a kilogramme. North Korean-made LED light bulbs sold for 42,000 won ($5). The exchange rate used in these prices – 8,400 won to the dollar – is 80 times higher than the official rate of 105 won to the dollar. At the official rate, the TV would cost over $100,000; the light bulb, $400.

Shoppers openly slapped down large stacks of U.S. dollars at the cashier’s counter. They received change in dollars, Chinese yuan or North Korean won – at the black market rate. The same was true elsewhere in the capital: taxi drivers offered change for fares at black market rates, as did other shops and street stalls that Reuters visited.

For the last twenty years, North Korea has been undergoing economic changes, the fruits of which are now more visible than ever in the capital, Pyongyang, where large North Korean companies now produce a diverse range of domestically made goods to cater to this growing market of consumers. People are spending money they once hid in their homes on mobile phones, electric bicycles and baby carriers.

The latest sign that the workers’ paradise is going capitalist: cash cards from commercial banks.

GREW OUT OF FAMINE

Four months before Kim opened the Pothonggang Department Store, the United States imposed sanctions on North Korea, including its imports of luxury goods, for torpedoing a South Korean ship – a conclusion Pyongyang rejected. Since then, the U.N. has imposed more sanctions on North Korea for violating restrictions on its nuclear and missile programmes.

None of that has had much effect on the vast majority of North Koreans living in the countryside, where a rudimentary market has evolved considerably over the past two decades. Agricultural mismanagement, floods and the collapse of the Soviet Union led to famine in the mid-1990s. The state rationing system crumbled, forcing millions of North Koreans to make whatever they could to sell or barter informally for survival.

The regime penalised this new class of entrepreneurs in 2009 when it redenominated the won by lopping off two zeros and setting limits on the quantity of old won that could be exchanged for the new currency. That move ended up destroying much of the private wealth earned on the market.

Demand for hard currency surged after the bungled currency reform as more and more merchants in the underground markets required transactions to be conducted in foreign currency. It triggered two years of hyperinflation.

But the government of Kim Jong Un, who became North Korea’s leader after his father’s death in December 2011, has essentially accepted the ubiquity of the black market rate and a widespread illicit economy, North Korea experts say.

“Under Kim Jong Un, not a single policy has been implemented which would somehow damage the interests and efficiency of private businesses,” said Andrei Lankov, a North Korea expert at Kookmin University in Seoul.

“It’s a good time to be rich in North Korea”.

THE NEW CONSUMER

Many of the goods inside the Pothonggang Department Store, a grey building nestled between willow trees and a river of the same name, are still beyond the reach of many North Koreans.

An air conditioning unit sells for 3.78 million won ($450 dollars) – which if paid in won would require a bag of 756 five thousand won notes, the highest denomination note in won.

A growing middle class called “donju”, meaning “masters of money”, who made cash in the unofficial economy are starting to spend it on these new products, along with the long established elite of Humvee-owning individuals with powerful political connections.

Only recently an elite item, mobile phones are now common in the capital, with nationwide subscriber numbers topping three million, an employee with Koryolink, the cellular carrier controlled by Egypt’s Orascom Telecom told Reuters.

The number has tripled since 2012 and indicates one in eight of North Korea’s 24 million people now have a mobile phone.

Energy-saving products are a fast-growing sector of North Korea’s new consumer market and were one of the hottest items in the department store.

Domestically produced LED bulbs are ubiquitous in North Korea, where satellite images have shown a country almost completely black at night. The 9-watt bulb costs $5 and is a best-seller at the Pothonggang store, said a staff member. The energy-saving bulbs are used inside homes and on street lamps that now bask the formerly darkened streets of the Pyongyang night in a dull, faint glow.

Solar panels with USB-enabled inverters and batteries are available in the store alongside water pumps and small generators – exactly the kind of systems North Koreans now use to take power into their own hands.

CASH CARDS

Baby products are another booming consumer item. A large section of the department store is devoted to strollers and baby carriers produced in China and South Korea.

Many residents of Pyongyang can be seen riding Chinese-made battery powered bicycles, which only began to appear in the capital over the last year, locals said.

Some of these transactions are done with the Narae Card, a cash card run by North Korea’s Foreign Trade Bank – a designated entity under U.S. sanctions since 2013 for the part it reportedly played in nuclear weapons procurement.

Cash cards have been in the hands of the few for the last several years but have recently become a new growth industry. Narae cards are topped up with U.S. dollars and are mainly used for foreign currency purchases. They can also be used to top up mobile phone accounts.

Foreign investors can also set up banks in North Korea and are allowed to lend money and provide credit-based financing schemes to North Korean companies, according to a bilingual book of North Korean law available to foreign investors.

Ryugyong Commercial Bank, for instance, offers shopping discounts as well as gold or silver card options for its customers. As with the Narae card, customers are encouraged to top up their accounts with dollars.

LOSING FACE?

After a $4 dollar taxi ride, the driver reluctantly handed the change from a twenty dollar note to a Reuters correspondent who insisted on getting change in North Korean won.

Foreigners are not officially permitted to use the currency, so the openness of the transaction – in the presence of a government guide – was another sign of the black market turning white in north Korea. The driver’s reluctance to hand over won was because of its inconvenience, not because he was afraid of being caught.

“It’s a lot of notes in our money,” he grumbled, counting out 130,000 won from a large crumpled bundle of discoloured 5000 won notes.

That note, still the highest denomination, once carried a smiling portrait of founding president Kim Il Sung but is being gradually phased out by a version with no portrait – an indication a larger denomination note may one day replace it to accommodate the widespread use of black market pricing.

That would also get around the embarrassing problem that the faces of American and Chinese leaders, not the Kims, adorn much of the cash used in the country now. For a regime that has cultivated a personality cult around the Kim dynasty, it is quite literally losing face on its own money.

MATTER OF TIME

Where there’s commercial enterprise, advertising is sure to follow. Sprinkled in among the roadside signs and billboards, once the exclusive domain for propaganda, are small notices that tout car repair services, electronics and trading companies

One prominent company, Naegohyang [Naekohyang/내고향] (my homeland) advertises at football games and has a women’s football team by the same name. It produces everything from clothes and sanitary pads to 7.27 brand cigarettes, a favourite of Kim Jong Un’s who can be seen smoking them on state TV. They also make ‘Achim’ cigarettes for export to Iran with printed health warnings written in Farsi.

At a speech following a military parade marking the 70th anniversary of the ruling Workers Party, Kim Jong Un promised to introduce “people-first” politics. It remains unclear, however, how committed he and his Workers Party – not to mention the powerful military – are to market-based reforms.

But it’s only a matter of time before the Kim regime formally adopts a market-based economy – as China did 35 years ago under Deng Xiaoping, said Kookmin University’s Lankov, who lived in Pyonyang in the 1980s.

“That’ll be a great day, but it’ll be relatively meaningless in one regard,” he said. “It’ll be a formal recognition of something which has happened anyway”.

Read the full story here:
North Korea’s black market becoming the new normal
James Pearson
Reuters
2015-10-29

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