Posts Tagged ‘Bonds’

North Korea reportedly suspends public bond program

Tuesday, October 27th, 2020

By: Benjamin Katzeff Silberstein

This blog has followed as closely as possible, over the past few months, the issue of North Korea’s public bonds program. It was in April of this year that news first surfaced of the North Korean government having issued public bonds, to drive in more cash to the state. The central worry with all this was that the state would use coercive methods to force people to purchase bonds, thereby creating significant distress among the public, and sucking out resources from the private economic sector.

For months, however, little subsequent reporting came on the bonds. This indicated that the state was perhaps not moving forward with the program all too aggressively.

It turns out this seems to have been what happened. Some days ago, Daily NK, who originally broke the story, reported that the North Korean government appears to have abandoned the project around early September, after what some claim was some initial success:

While the halting of the scheme appears to signal its overall failure, some North Korean officials believe that the bonds helped to quickly bring in funds the state needed to continue building the Pyongyang General Hospital and prepare for the Party Foundation Day celebrations on Oct. 10.

A Pyongyang-based source told Daily NK yesterday that the Central Committee’s Economic Affairs Department issued an order early last month to the Cabinet and its subordinate agencies that concerned “suspending the issuance of the bonds.”

The order noted that the “distribution of the state agency public bonds and state trade public bonds” would “temporarily be suspended”; that there would be a review of the bonds that were sold and those in stock by the State Planning Committee’s Financial Affairs Board; and, that bonds allotted to “each agency” would be collected, then gathered and “frozen” at the Central Bank. In short, the order stated that all bonds – except for those already in distribution or sold – will no longer be considered valid.

The source, who spoke on condition of anonymity, told Daily NK that the order further stated that “in accordance with an order from the central [leadership], a review of the current financial status of agencies that have used the public bonds will be conducted and [their] planned quotas for this year may be adjusted.” This suggests that the leadership is willing to “eliminate difficulties” faced by “lower-ranking work units” that “loyally” took part in the bonds scheme and that they may receive unspecified “benefits.”

The Economic Affairs Department’s order was reportedly issued after North Korean leader Kim Jong Un acknowledged the failure of his country’s economic policies at a Workers’ Party plenary session in August.

“[The] economy was not improved in the face of the sustaining [sic] severe internal and external situations and unexpected manifold challenges,” Kim reportedly said during the plenary session. He also announced during the meeting that a new five-year economic development plan would be presented at the Eighth Party Congress next January.

It appears that after Kim acknowledged the failure of the country’s existing “five-year economic development strategy” and presented plans to establish new economic goals the Central Committee’s Economic Department discussed revising the scale of the public bonds scheme.

According to the source, the Economic Affairs Department order stated that it “permits the revision of tasks related to the five-year people’s economic plan of last year and this year due to the distribution of public bonds.”

As part of efforts to increase the country’s foreign currency stores, North Korean authorities gave members of the donju, North Korea’s wealthy entrepreneurial class, and private business people “business rights” in return for having them purchase the bonds in foreign currency. Now that the bonds are not longer being issued, it appears that the Economic Affairs Department has been forced to revise its plans.

[…]

An internal investigation by the Central Committee in August found that less than 20% of the bonds earmarked for the donju (“state trade public bonds”) were sold off.

The authorities tried to woo the donju and private business people to buy the bonds by offering them “patriotism awards” and “business rights”; when that did not work, the authorities resorted to “forced allocations.” All of these efforts apparently had little effect in getting the bonds sold. The failure to sell the bonds seems to have been a major factor in the Economic Affairs Department suspending the sale of the bonds.

Within the Economic Affairs Department, however, some argue that the public bond scheme has not “completely failed” and that it “significantly helped” the country prepare for the Party Foundation Day celebrations despite facing unexpected obstacles such as the COVID-19 pandemic, typhoons, and floods. They also claim that the public bonds scheme was an “experimental yet daring attempt.”

In contrast to this assessment, the source argued that the “public bonds [scheme] was a measure that completely failed to consider the realities of the people’s economy [civilian economy].”

(Source: Jang Seul Gi, “N. Korea suspended public bonds scheme in early September,” Daily NK, October 23, 2020.)

The allocation of “business rights” sounds an awful lot like an attempt to more strongly formalize practices on which the economy already runs…

In any case, this signals a comforting sense of pragmatism among North Korean economic policy makers on this particular issue. It’s impossible to rule out, however, that the idea might come up again should the economic situation continue to deteriorate, and perhaps, regrettably, with stronger methods of coercion to back it.

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The wild fluctuations of North Korean exchange rates

Wednesday, May 20th, 2020

By: Benjamin Katzeff Silberstein

New market prices for North Korea came out recently, and lots is happening. Rice prices are down significantly, but compared to last year, the levels so far are quite normal. We should expect them to rise as the country goes further into the lean season between May and September (roughly). Foreign exchange rates, perhaps most interestingly, are fluctuating quite significantly, and the dollar especially so. The USD took a dive late last month, but it’s been fluctuating quite significantly before that as well, which would be more visible if not for the recent dive in the graph:

KPW-USD rates in three North Korean cities. Data source: Daily NK.

It seems that uncertainty itself is one of the main reasons. One in-country source told Daily NK:

“Even ordinary sellers who have long conducted relatively stable transactions in foreign currency are now afraid of losses because of dramatic fluctuations in the exchange rate,” the source told Daily NK. “Recently, the changes have been so frenzied that it’s not exaggerating to say that the prices in the afternoon will be different from the prices in the morning.”

“Wholesalers at the Pyongsong Market whose main patrons are other wholesalers throughout the country are complaining about the impact of the fluctuations in the exchange rate,” continued the source. “There are such major changes in the exchange rate between when wholesalers receive goods and then pass them along to retailers that uncertainty prevails.”

Citing exchange rate fluctuations of around KPW 1,000 in the past, some people reportedly do not believe that the fluctuations are a big deal. Yet, “most people think that we can’t sit idly by because the prices of imported goods are [also] increasing,” the source said.

“The damage done to businesses due to the exchange rate [fluctuations] and the increase in commodity prices are making things difficult for those who deal with transactions in foreign currency,” he added.

(Source: Kang Mi Jin, “Fluctuating exchange rates cause headaches for N. Korea’s business people,” Daily NK, 19/7/2020.)

It’s not just the government’s Covid19-measures themselves, such as the border closure, that impact the exchange rate. As noted on this website yesterday, the state is taking coercive actions of various forms to bring in funds, such as reportedly banning the use of foreign currency for domestic transactions in the hope that people will see no choice but to exchange their foreign money for domestic, bringing in much needed foreign exchange to the state.

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North Korea’s government bonds, and other economic coercion

Tuesday, May 19th, 2020

By: Benjamin Katzeff Silberstein 

For long, one of the main mysteries of the North Korean economy was how the government managed to keep the economy afloat despite what seemed, for a long time, like fairly stern sanctions implementation by China. North Korea’s market prices for both food and foreign currency remained largely stabile, while price for products such as gas perhaps at times were more volatile than normal, but still not at crisis levels. One of the most puzzling facts was that there were very few signs that state finances were hurting, although by all metrics, they should.

There are several reasons why they most likely did, quite severely, although it wouldn’t necessarily show up in market price data. Perhaps the state sector and marketized sectors are not as closely intertwined as many have thought, or perhaps the government was conducting stabilizing measures that somehow actually worked, either by coercion or market interventions.

The recent news that the government has issued bonds, however, is one of the more concrete signs of significant distress in North Korea’s state finances. In mid-April, Daily NK reported that the government would issue public bonds for the first time in 17 years, partially to finance construction of the Pyongyang General Hospital by ordering institutions involved in the project to pay subcontractors in bonds. A few days later, Daily NK confirmed that bonds had been issued, and that they would be used instead of cash to pay factories for materials necessary for state projects and the like. 40 percent of the bonds would be sold to individuals and 60 to enterprises. Sources that Daily NK spoke to were critical – unsurprisingly – and said that the measure was part of a general drive by the regime to soak up desperately needed cash, and not least foreign currency:

“The government failed to raise the funds it needed when it last floated bonds back in 2003,” another source in the country told Daily NK.

“The government is returning to this already failed way of doing things and only factories and business people will suffer,” he added.

Factories are being pressured to purchase the bonds and donju may face legal punishment or damage to their businesses if they fail to buy the bonds, Daily NK sources warned.

In response to the plan to float public bonds, high-level regime officials are reportedly starting to hoard US dollars. The Ministry of State Security (MSS), the country’s feared security agency, reportedly mobilized teams on Apr. 17 to crack down on those exchanging North Korean won for foreign currency.

“Money dealers have disappeared after it was made known that the MSS would arrest them for peddling dollars,” the first source told Daily NK.

“Donju in Pyongyang are desperate to buy up dollars but there’s nowhere to buy them,” he added.

(Source: “North Korea has begun issuing public bonds,” Daily NK, 22/4/2020.)

It might be worth pausing here to remember what bond are and why the North Korean government has (reportedly) issued them. Put simply, a bond is a loan that an investor – the entity that purchases the bond – gives to the issuer of the bond. Of course, it is very normal and common for governments to issue bonds. But in the case of North Korea, the problem is that investors have good reasons to have little faith that the state will actually be able to hold up its end of the bargain. In that case, the coercive bond sales essentially entail the state expropriating funds from individuals and institutions. The full details of the conditions of the bonds remain unclear, to the present author’s knowledge.

The danger is that when donju and other North Koreans with means don’t want to purchase bonds, the state may use force and coercion to make them do so even when they don’t see it as being in their economic interest. To many significant market actors, it’s likely already clear that those who refuse to purchase bonds or accept them as payment – if they even have that choice – may run into obstacles in running their businesses in the future. Judging by the reports so far, it seems that any organizations that require state funds to purchase raw materials or supplies now use bonds instead of cash, though it’s hard to imagine that this practice really extends to all such actions. In any case, for all the multitudes of ways in which the North Korean economy has changed over the past few years, the omnipotence and autonomy of the state, when it chooses to exercise it, remains.

When economic actors don’t want to purchase bonds voluntarily, coercion is another route to take. In a country such as North Korea, few economic actions are entirely non-political. Therefore, we should not be all that surprised that an owner of mine shafts near Pyongyang has reportedly been executed for his refusal to buy bonds. Part of the reason for the harsh punishment was his criticism of the state and the Party, but nonetheless, refusing to buy bonds was itself a political action:

The source told Daily NK that the sales department director had called the meeting to echo calls by the government to “spend their dollars and participate in the national public bond purchasing plan.” While the other mine shaft owners quietly listened, Lee reportedly asked the director what would happen if he chose to “not buy any public bonds.”

The sales department director responded that the act would be considered “reactionary” because it would mean refusal to carry out party policy.

Lee responded sarcastically, asking in what way the “state” and the “complex” had helped him build up his mining business. His response led to a war of words between the two men.

“The sales department director immediately reported the events of that day to the complex’s party committee. The committee convened a ‘security committee meeting’ [안전위원회] that ended up reporting Lee to the Ministry of State Security [MSS],” the source said.

Security committee meetings are convened at the provincial, municipal and county levels to discuss and make decisions on urgent matters. Participants typically include the chairman of the relevant party committee, the chairman and vice-chairman of the local people’s committee and management-level security officials.

The MSS did not immediately take action against Lee. It was not until May 6 that agents from the security agency visited the complex, forced all the complex’s workers to gather in the facility’s Laborer Hall, and then arrested Lee in front of them for “verbal reactionism” (말 반동). Lee was charged with “criticizing party policy” and he was immediately executed without trial or any other due process.

(Source: Ha Yoon Ah, “N. Korean businessman executed for refusing to buy gov’t bonds,” Daily NK, May 12th, 2020.)

The state is simultaneously using less coercive means to induce donju to invest in state enterprises. Nonetheless, the government is unlikely to raise the sorts of funds it hopes to through the bonds without serious means of coercion. It’s also not the only recent measure that suggests that the regime is quite seriously short on cash, and foreign currency in particular. Radio Free Asia reported on May 11th that the state has banned the use of foreign currency for most transactions, to force people to exchange their foreign currency for domestic at state institutions.

We don’t know the scale at which measures such as these are being implemented. They are unlikely to work in the longer run and may well be rolled back in time. But still, much damage may be done in the process.

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