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Dec 3, 2009 | 16:14 GMT

North Korea: Unexpected Currency Changes

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Summary
The North Korean government announced Nov. 30 that it was simultaneously changing and revaluing the country's currency — a surprise move that left most shops in the country closed for days, unable to operate without supplies of the new currency. There are several reasons why Pyongyang might have made such a move, not the least of which is a desire to strengthen the North Korean won.
Most North Korean shops remained closed Dec. 3 after the government abruptly announced three days earlier that it was simultaneously changing and revaluing the currency. At 11 a.m. local time Nov. 30, North Korean officials announced domestically that, beginning at 2 p.m. the same day and running through Dec. 6, all North Korean currency would need to be exchanged for new bills at a 100-to-1 exchange, with a maximum allowable exchange per person of 100,000 won, the equivalent of approximately two years' salary. Foreign diplomats operating in North Korea were informed of the change later, after noticing many shops were closed. Apparently, in an interest to retain secrecy and avoid a rush on the black market exchange, Pyongyang did not even notify or pre-distribute the new currency to markets or shops, leaving them unable to operate. The North Korean regime is known for surprise decisions and actions, and has made changes in its currency before (though usually at a one-to-one exchange). However, past actions like Pyongyang's unannounced long-range missile or nuclear tests came with some forewarning, even if only from the rumor mill. The Nov. 30 announcement came with little such forewarning and caught North Koreans, foreign observers and those with economic interests in the country (like traders in China) off guard. While foreign activists are reporting dire actions by North Korean citizens during the currency transitions, foreign diplomats (who are active primarily only in Pyongyang itself), are only reporting shop closures and concerns about food availability during the transition week. In short, it remains, as usual, unclear exactly what is going on in North Korea. There are several possible (and not mutually exclusive) reasons for Pyongyang to make such a currency change at this time. Over the past year and a half, the value of the North Korean won on the black market exchange has plummeted amid domestic economic problems, hindrances in trade and economic exchanges with South Korea, and troubles in trade with neighboring China. Foreign (particularly South Korean) activists have also been sending North Korean currency into North Korea (via balloons or through illicit networks along the Chinese border) for quite a while, in an attempt to undermine North Korean domestic economic control. Initially, these were large-denomination bills (whether they were real or counterfeit is unclear), but North Korean authorities began cracking down on ordinary North Koreans who tried to use these bills. The activists then shifted to smaller denominations, but it is clear their actions were already beginning to have an effect in the North, at least in the eyes of the regime. The change in denominations not only stops this flow (at least for a while) but can also expose individuals who have hoarded the imported bills, as there is a strict limit on the amount of North Korean currency that can be converted into the new won. These restrictions on the amount exchangeable are another interesting factor in North Korea's move. Whether intentional or not, the limit will equalize the wealth of a swath of the population, bringing some the "middle class" (who keep their savings in won, as opposed to the wealthy who hold foreign currency accounts) down to the maximum exchangeable value, and effectively eliminating a portion of their savings. The black marketeers also take a potential hit if they are left holding too many of the old won. The elite have already complained, according to reports, and the exchange limits have risen, including a substantial allowance for money sitting in the bank. But the real motivation may be about North Korea's economic plans. In theory at least, an act like this that removes a large quantity of currency from circulation should result in a sharply stronger currency. Pyongyang has experimented several times with new economic policies, and there has been a review under way to consider opening more of the country — particularly in natural resources, but also in manufacturing — to foreign investors. Pyongyang, concerned that North Korea's exposure and dependency on China is already too high, would like to bring in European investors, as opposed to more Chinese investors. By redenominating the currency and limiting the amount in circulation, Pyongyang may be able to raise the value of the won, which is necessary if Pyongyang intends to increase international economic interactions. This could explain why Pyongyang was willing to go through the chaos of revaluation without forewarning — both to avoid individuals' taking advantage of the foreknowledge to turn to foreign currency, and to take tighter control of the economy ahead of structural changes. Many of Pyongyang's economic moves over the past year have seemed somewhat odd or counterproductive, but there may be shifts under way in North Korea's economic planning, and the revaluation could be a signal of coming changes.
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