Mobilization of idle funds emphasized for fiscal expansion

June 20th, 2014

Institute for Far Eastern Studies (IFES)
2014-6-18

With the international sanctions against the DPRK and the country’s continual isolation, North Korean authorities are stressing the need to mobilize the “cash in the closet” being kept by more and more North Korean people and institutions.

According to an article published in the Kim Il Sung University Gazette (Vol. 1, 2014, January 20), “The Basic Direction of Financial Management and Measures to Resolve Funding Problems Based on Kimilsung-Kimjongilism,” one solution to finance the enormous defense and economic construction costs is to “mobilize idle funds.”

The article states the following: “Some of the funds that are being circulated in the market have strayed away from the normal production process and distribution passage and remain harbored in the hands of organizations, enterprises, and people. . . . Mobilization of idle funds shall meet the funding needs of the state and serve as a source of supplementary income to increase state revenue.”

The article adds that “The state should secure idle funds of institutions and enterprises through banks and mobilize idle cash kept by the people through savings and insurance,” and furthermore states that “Banks should concentrate to have control over idle funds.”

According to the article, “Dependence on foreign aid to resolve funding problems will lead to continuous financial subjugation.” Mobilization of idle funds is seen as a necessary policy to realize the national goal of “autonomous economy,” which takes precedence over attracting foreign investment.

Since the early 2000s, North Korea has emphasized the need to mobilize institutions’ and persons’ idle funds. But the North Korean people remain reluctant to save money in banks for the fear of revealing their income to authorities and anxiety over the possibility of losing their savings.

The recent increase in North Korean academia’s emphasis on the “fiscal expansion through the mobilization of idle funds” began from late last year, but it also appears to serve the purpose of attracting capital to fund economic development zone projects, which is currently suffering from fund shortages.

North Korea continues to seek opportunities to expand trade and exchanges with Russia and China but is also turning an eye toward the domestic market to fully maximize its objective of fiscal expansion.

In addition, the issue of introducing commercial banks (as a means to effectively mobilize idle funds of the private sector) is being raised again — a policy that remained inactive for a decade due to insignificant results.

North Korea instituted the Commercial Banking Act in 2006, but the actual operation of the bank has yet to be confirmed.  

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New KNIC web page

June 19th, 2014

The Korea National Insurance Corporation (KNIC) has a new web page that is internet accessible. Martyn Williams was the first to notice it. Although the web page offers information in English and Korean, I have only examined the English portal and I am unaware if there are significant differences between the two.

According to the web page:

KNIC, as a sole insurer of the DPR Korea has over 10 provincial insurance branches and over 200 insurance offices at municipal (district) and county levels under its umbrella nationwide and representative offices overseas.

The English web page provides basic financial and corporate information from 2008-2012. You can check out financial highlights, underwriting performance, and the consolidated balance sheet. It is unclear why 2013 and Q1 2014 data is not presented, but it is not like the shareholders or regulators are going to be up in arms about it.

On the corporate side we have a letter from the chairman of the executive management committee (since there are no shareholders he cannot be chairman of the board of directors)–again seeming to date from late 2012 or early 2013. We also see a list of the members of the executive management committee and an organization chart. The organization chart shows a list of internal divisions but does not explain how KNIC is linked to the cabinet.

KNIC posted a table of financial data (all numbers are in millions of KPW and cannot be verified):

KNIC-table

The chart shows gross written premiums (총접수보험료) experienced an average growth of 16.6% (from 41,939m KPW to 48,905m KPW) between 2008 and 2012. Investment revenue (투자수입) also increased 87% (from 1,597m KPW to 2,996w KPW). Profits (순소득), however, fell 31% on average from 8,041m KPW in 2008 to 5,544m KPW in 2012. So over time, the firm has experienced increasing costs. I am not sure what these costs are, but if you love forensic accounting, please go through the financial reports and let me know.

The DPRK won experienced a significant loss in value compared to the US$ on the black market in 2012, falling from 4,400 to 9,100 per 1$. Using an annual average rate of 6,750 KPW to the US$, profits totaled just $821,333. Using the black market rate of 9,100, profits total $609,203. Using the official rate of 100KPW to the US$, profits grow to $55.44 million. Using the official Euro rate of 130KPW, profits total E42.64 million.

It is unclear what exactly “Pre-state payment result” (국가납부전 결과) is, but I believe it is the equivalent of “Earnings Before Taxes (EBT)” under Generally Accepted Accounting Principles (GAAP). Since the DPRK has officially abolished taxes, direct cash transfers to the state must take another name, so it appears to simply be “State Payment”, but it is definitely not “tax”.

“Profit for the year” listed for each year is .675 of the “Pre-state payment result” which tells us the unofficial tax rate on the firm is a flat 32.5% (1-.675) on net earnings.

It is unclear what happens with profits in these firms. In privately owned firms in capitalist countries, profits are generally reinvested in the business or distributed as dividends to shareholders, partners, or proprietors.

Moving on to the corporate side, the web site lists the following major operational departments:

1. Property Insurance Department is in charge of non-life insurance classes, such as property, crop, livestock, engineering and motor applied from institutions, enterprises, cooperatives and individual citizens.

2. Marine Insurance Department handles such lines as marine hull, cargo and liability, aviation hull and liability applied from institutions, enterprises and cooperatives.

3. Life Insurance Department provides life and personal accident coverage applied from institutions, enterprises, cooperatives and individual citizens.

4. Economic Cooperation Insurance Department offers different classes of insurance to newly developed economic zones and foreign invested enterprises (foreigners, joint ventures, representative offices, correspondent branch offices, embassies and international organizations) including Rason Economic and Trade Zone and Hwanggumphyong and Wihua Islet Economic Zone.

5. Reinsurance Department organizes reinsurance protection for primary insurance accounts written by KNIC. This department has a bad reputation in the west.

6. Investment Department conducts investment activities into financial securities and mining, and manages non-insurance enterprises like a shipping company.

7. Additional divisions: Market Research, Insurance Cooperation, Financial Supervision, Finance & Accounting, Administration and Protocol, all of which are engaged in their respective functions.

 

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UN World Food Program cuts nutrition program for DPRK

June 19th, 2014

According to Yonhap:

The World Food Programme (WFP) has decided to curtail its nutrition program for North Korean babies and pregnant women by about 30 percent due to a lack of funding, a U.S. report said Thursday.

The WFP is operating the two-year nutrition program worth US$200 million in North Korea through 2015, targeting 2.4 million children under the age of 5 as well as pregnant women.

But a lack of funding seemed to lead the U.N. food agency to decide to reduce the operation of its nutrition program, according to Radio Free Asia (RFA).

The WFP’s total budget for its humanitarian aid to North Korea reached $137.5 million, down about 30 percent from its original plan, according to the report, it added.

The number of North Korean children and pregnant women who benefited from the WFP’s program reached some 840,000 last month, far below the agency’s target.

Ertharin Cousin, the executive director of the WFP, said in late May in Seoul that its nutrition program stands at a “very crucial juncture,” adding that it had received only 20 percent of the funding required to implement the program.

The North has relied on international handouts since 1995 to help feed its people suffering from chronic food shortages.

The WFP’s humanitarian aid to North Korea reached $26.56 million last year, compared to $86.94 million in 2012, according to the U.N. food agency.

In November, the agency said that food production in the North is estimated to have been 5.03 million metric tons in 2013, up 5 percent from the previous year.

Stephan Haggard has a review of the WFP’s efforts in the DPRK here.

Read the full story here:
Underfunded WFP cuts nutrition program for N. Korea: report
Yonhap
2014-6-19

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DPRK creates Ministry of External Economic Affairs

June 18th, 2014

According to KCNA:

Ministry of Foreign Trade Reorganized as Ministry of External Economic Affairs

Pyongyang, June 18, 2014 20:58 KST (KCNA) — The DPRK decided to reorganize the Ministry of Foreign Trade as the Ministry of External Economic Affairs of the DPRK by merging the Joint Venture and Investment Commission of the DPRK and the State Economic Development Committee of the DPRK with it.

The Presidium of the DPRK Supreme People’s Assembly promulgated a decree in this regard on Wednesday.

Here is what Choson Exchange, who predicted the merger, had to say:

We think this is a good thing. Investor agreements, ‘exclusive’ rights and attraction need to be streamlined to prevent multiple ‘exclusive’ rights being sold. While this can bureaucratize the investment process, things really can’t get more bureaucratic than it is now in North Korea.

Here are previous posts on the Ministry of Foreign Trade, the Joint Venture Investment Commission (JVIC), and the State Economic Development Committee (SEDC).

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ROK private sector aid to the DPRK at low

June 16th, 2014

ROK-DPRK-aid-Hankyoreh

According to the Hankyoreh:

In terms of levels of private-sector [interchanges], the situation is even worse than the previous all-time low under the Lee administration. According to the annual White Paper on unification published in March, the total amount of private aid to North Korea authorized by the Ministry of Unification in 2013 stood at 5.1 billion won (US$5million). This amount not only pales in comparison to the 90.9 billion won (US$89.3million) okayed in 2007, the last year of the Roh Moo-hyun administration, but is only one-sixth the 31.0 billion won ($30.5 million) annual average during the Lee years. Even in 2011 and 2012, years when interchange and cooperation with North Korea were banned under the May 24 measures adopted in the wake of the ROKS Cheonan sinking, aid from NGOs amounted to 13.1 billion won (US$12.9million) and 11.8 billion won (US$411.6million), respectively. Between 120,000 and 180,000 people traveled between the Koreas under the Lee administration in comparison with last year’s total of 76,000. The Ministry of Unification is calling the numbers misleading.

“Last year, there was not any real aid to North Korea until August because all ties had been cut off after their third nuclear test in February,” a senior ministry official said on condition of anonymity. “The amount of aid and the number of people involved in exchange fell because there was a six-month vacuum,” the official explained.” The NGOs are countering by arguing aid has remained at a low 2.1 billion won (US$2.06million) this year, despite a lack of major frictions.

There are, however, signs of some change in inter-Korean interchange though the NGOs are cautioning against reading too much into the government’s decisions. On June 4, the Ministry of Unification approved the first agricultural exchange effort since the May 24 measures. The Gyeongnam Unification Agricultural Cooperation Committee has sent 33 million won (US$32,400) worth of strawberry seedlings to North Korea, where they are to be grown for four months before being brought back South

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Chinese investment in the DPRK

June 13th, 2014

Stephan Haggard posted some interesting information on Chinese investment in the DPRK. See his posts here and here.

In this graph, Dr. Haggard breaks down the Chinese investment data by year and industry:

registered-investments-in-China-by-industry

It is worth noting that the graph only sums the number of registered projects, not the value of the investments. Based on satellite imagery and trade data, I think we can make a strong case that the mining sector would be the area receiving the largest infusion of Chinese investment inflows.

Dr. Haggard also shows that most Chinese investment flows into the DPRK originate from the provinces along its border:

china-investment-in-dprk-by-province

In a second post, Dr. Haggard offers a graph of cumulative direct investment from China:

 China-FDI-in-NK-stock-and-flow

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North Korea encourages completion of large-scale projects to coincide with 2015 Party Foundation Day

June 12th, 2014

Institute for Far Eastern Studies (IFES)
2014-6-12

North Korea is attempting to complete the construction of a large scale stockbreeding base and a power plant as symbols of “self-rehabilitation” by October 10, 2015 to coincide with the 70th anniversary of the foundation of the Worker’s Party of Korea (WPK). Adorned with these economic achievements, next year’s Party Foundation Day will seek to inspire confidence in the North Korean people and strengthen the foundation of the Kim Jong Un regime.

The Choson Sinbo, a news affiliate of the pro-North Korean General Association of Korean Residents in Japan, published an article on June 2, 2014 which introduces the Sepho County area of Kangwon Province and the current situation of construction at the stockbreeding complex, reporting that “all construction is planned to be completed by next year’s Party Foundation Day.” Sepho Tableland Construction Company, which began construction of the Sepho County stockbreeding complex toward the end of 2012, is a national company propagandized by Kim Jong Un as the “Great Plan for the Transformation of Nature.”

The construction of the North Pyongan Chongchon River Power Plant, another one of North Korea’s large scale projects, began in January 2013 and is also projected to be finished by next year’s anniversary. Secretary of the Worker’s Party of Korea Kim Ki Nam was quoted at an April 10, 2014 Pyongyang mass rally, saying, “We must magnificently complete the Chongchon River Power Plant and Sepho County Stockbreeding Base by the Party’s 70th anniversary as a proud gift to our motherland.”

The Chongchon River Power Plant and the Sepho Tableland have been chosen as the two main tasks to be completed in celebration of next year’s anniversary of the foundation of the WPK. The news outlet of the Worker’s Party, the Rodong Sinmun, pointed out in a May 11, 2014 article that the Chongchon River Power Plant will help alleviate the nation’s electricity shortage and stand as a symbol for the nation’s “self-rehabilitation spirit.”

In the past, North Korea has revealed new buildings and symbolic structures before and after major anniversaries in order to brighten the public mood; however, the Kim Jong Un regime’s decision to undertake two large-scale construction projects and finish them both by the anniversary date is worthy of attention.

North Korea is expected to raise their agricultural production goals based on the successful completion of the Sepho Tableland and Chongchon River Power Plant. In his letter to the National Conference of Agricultural Subworkteam Leaders in February 2014, Kim Jong Un stated, “From the year 2015, when we will greet the 70th anniversary of the founding of the Workers’ Party of Korea, [the agricultural sector] must hit higher grain production targets.”

Coinciding with the projected agricultural increase, the Choson Sinbo reported that production of livestock will also increase with the completion of the Sepho Tableland: “Annual meat production is expected to increase in stages, from five thousand tons in 2017 to ten thousand tons annually by the year 2020.” Provided that these two large-scale projects can be completed according to plan and produce successful results, it is expected that Kim Jong Un’s position within the Party will be strengthened considerably.

As much as the Sepho Tableland and Chongchon River Power Plant give confidence to the North Korean people that their food shortage problem is being solved, it is also assumed that Kim Jong Un will use the success of these projects in order to begin a legacy of his own “achievements.”

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Some western tourism numbers

June 12th, 2014

According to Reuters:

While the country does not publish tourist numbers, travel agencies estimate as many as 6,000 Westerners visit the country every year, compared to just 700 a decade ago. Most are adventure-seekers curious about life behind the last slither of the iron curtain, and ignore critics who say their dollars are propping up a repressive regime.

Beijing-based Koryo Tours, one of the biggest operators sending Westerners into North Korea, has seen a tenfold rise in business in the past decade, peaking at about 2,100 visitors in 2012, according to Simon Cockerell, its general manager.

Around a quarter of those, Cockerell said, were American.

Troy Collings of Young Pioneer Tours, another China-based foreign travel agency specialising in trips to North Korea, says his company is seeing business double annually, and had nearly 1,000 clients in the past year.

Read the full story here:
Isolated North Korea a visitor draw, but sometimes literally a tourist trap
Reuters
James Pearson
2014-6-11

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Data on Kaesong’s cumulative performance

June 12th, 2014

According to Yonhap:

Cumulative production of the inter-Korean industrial park has come to US$2.3 billion as the most salient outcome of rapprochement between the Koreas marks its 10th anniversary of operations this week, the unification ministry said Thursday.

The joint factory complex in the North Korean border town of Kaesong opened a decade ago following the first inter-Korean summit meeting in 2000, in which their leaders adopted a joint declaration calling for closer cooperation and exchanges.

On June 14, 2004, a group of 15 South Korean groups signed contracts to operate factories in the then-newly built complex, inaugurating the era of the Kaesong Industrial Complex. In December that year, the joint complex saw its first batch of goods produced in its factories.

In the first full year of operations in 2005, annual output reached $14.9 million before jumping by more than 30-fold to $469.5 million in 2012, according to the unification ministry.

But yearly output nearly halved last year from 2012 after Pyongyang suspended operations of the Kaesong complex for five months from April amid inter-Korean tensions. The figure rose to $168.1 million in the first quarter of this year.

The value of inter-Korean trade through the park came to an accumulated $9.45 billion, according to the ministry.

A total of 940,000 people have visited the inter-Korean economic zone, with 125 South Korean firms currently operating in the complex designed to match deep-pocketed South Korean companies with cheap North Korean labor.

Among the firms, 73, or 58.4 percent, are textile firms, while another 24 firms are machinery or steel makers. The complex is also home to 13 electronics makers and 9 chemicals firms, the ministry noted.

The Kaesong complex also saw the number of North Korean workers grow from around 6,000 in 2005 to 52,000 as of recently, along with monthly salary more than doubling from $50 to more than $130.

Although this story reports salaries of $130, a separate story released just a couple of days ago claims the monthly incomes are just $70. I am not sure why the discrepancy.

Read the full story here:
Cumulative output of Kaesong park reaches US$2.3 bln
Yonhap
2014-6-12

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German firm to set up in Kaesong Zone

June 10th, 2014

According to the Wall Street Journal:

A German industrial needle maker will open an office in the joint inter-Korean industrial complex inside North Korea, South Korea said Tuesday.

The move will mark the first non-Korean business entity inside the plant but falls short of Seoul’s goal to bring in manufacturing operations from foreign companies to help ensure North Korea doesn’t unilaterally close the complex again.

The plant was shuttered for five months last year after Pyongyang withdrew its labor force during a sharp escalation in threatening rhetoric. Seoul officials in recent years have mulled over the possibility of attracting foreign companies, which they say would help the factories run without interruption.

Seoul’s Unification Ministry, which handles inter-Korean affairs, said Groz-Beckert, a maker of industrial needles and other tools for textile manufacturers, will open a sales office inside the facility, located a few miles north of the border. The ministry didn’t specify a schedule.

Here is coverage in AFP.

Here is coverage in Voice of America.

Read the full story here:
German Firm to Open Sales Office Inside North Korean Complex
Wall Street Journal
Jeyup S. Kwaak
2014-6-10

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