Signs of crisis in North Korea's exchange rate

The people will turn their back on a poor economy. Are North Koreans truly supporting Kim or abandoning him? Kim should realize his economic policy is betraying him.

By Kim Byung-yeonThe author is a chair professor of economics at Seoul National University.

The U.S. dollar that traded at around 8,000 North Korean won in the local market at the beginning of the year has surged to 15,000 won by early August, according to multiple North Korea-watching sources. Prices of rice and gasoline soared 18 percent and 46 percent, respectively, as well, but not as wildly as the near 80-percent jump in the greenback value against the North Korean won. Given the time lag in the reflection of forex in market prices, the jump in the exchange rate could prelude a spike in inflation. The personal incomes of North Korean residents are estimated to have been halved last year against the levels of 2016. If inflationary gains double against stagnation in nominal income, the real income of North Koreans this year could shrivel to one fourth of 2016.

The laggard performance of the North Korean economy would be a great upset to its leader Kim Jong-un who could have bet this year could the best after 2017. On top of good crops last year, cross-border trade has resumed after the pandemic. Cozier ties with Russia also raised expectations for economic aid. Then came the exchange-rate whammy. Public disgruntlement could worsen in the event of hyperinflation. The photo of Kim inspecting a flooded area on a rubber boat underscores his desperation to earn public confidence. What went wrong and what can be done to resolve the economic conundrum? But the policymakers and bureaucrats in Pyongyang may not understand the economy muddled with state planning and market will.

The cause of the crash in the North Korean currency value can be explained by two assumptions. First goes to the failure in the operation of artificial forex appreciation. Pyongyang in December announced a more than 10-fold spike in wages for employees at state-owned enterprises. The average monthly wage of 3,000 won, valuing less than 50 cents, was yanked up to 30,000 won to 50,000 won.

The drastic measure was to lure workers back to state-controlled labor sites from the market and rebuild the socialist economy. But it hardly could appeal to North Korean residents who could earn more than 300,000 won a month through individual trade activities in the market. It would also have been challenging to raise the funds without causing inflation. Policymakers thought the foreign earnings exchanged to local currency could fund the wage increase without stoking a surge in monetary supplies. They counted on the earnings from selling weapons to Russia and foreign reserves saved from food and energy assistance from Moscow. When that was not enough, they resorted to an artificial appreciation of foreign currencies to convert them into a greater amount of local money. They believed their operation would not affect inflation when the extra currencies are paid in wages, giving little impact on the privately-held monetary supplies.

However, this operation cannot succeed. Unless North Korea is entirely self-sufficient, the depreciation in the local currency translates into higher import costs and produce prices. The surge in prices could be contained to some extent through cheaply-acquired Russian food and fuel. But a substantial stock of food and fuel could be smuggled to sell in the market to exploit the gap in the official and market prices. If the war comes to an end and stops Russian aid as Moscow would no longer need North Korean weapons, the capped prices could suddenly spring up.

The operation requires the continued inflow of foreign currencies. Foreign money is needed to convert them into local bills and pay higher wages to contain inflation. But North Korea’s foreign exchange coffers are thinning. The depletion would accelerate when the extra earnings from Russia stop coming. If foreign exchange reserves run out and necessities cannot be imported, the country as well as the economy could be doomed. The operation therefore cannot be sustained.

Another assumption is that the regime might not have intended the depreciation. The dollar traded stably around 8,000 won from 2013 to late 2023. The regime would have wanted to keep it that way. But officials had to comply with Kim’s order to add light-industry factories every 10 years across 20 regions. To uphold the command, imports of construction and machinery equipment were essential. The cash-strapped government drew foreign currencies needed for imports largely from the private sector. Demand for foreign currencies was also built up on expectations of renewed trade. But supplies remained strained. The regime in 2021 forcibly brought down the dollar to 5,000 won to gobble up privately-held foreign currencies cheaply. The crackdown on individual forex dealers also fueled the dollar value. Authorities could have wished to cover up for their follies through the FX operation since the dollar already rose beyond their control.

The dictatorship’s fate can end through wars or economic collapse. The Hitler regime made the former and the Soviet Union had the latter. A wrecked economy brought down the Soviet empire, together with the satellite socialist states in East Europe. Stronger oppression, surveillance, propaganda and rabble-rousing were needed to maintain the regime against people exasperated from a lack of freedom and a widening gap with capitalist economies. The economy also poses as the Achilles' heel for North Korea. The people will turn their back on a poor economy. Are North Koreans truly supporting Kim or abandoning him? Kim should realize his economic policy is betraying him.