Budding private sector suspended as savers rush to change money after Pyongyang redenominates the won to curb inflation

This article is more than 10 years old

This article is more than 10 years old

North Korea's surprise decision to redenominate its currency has prompted panic and despair among merchants left with piles of worthless notes, even driving one couple to suicide, activists said today.

North Korea informed citizens and foreign embassies on Monday that it would redenominate its national currency, the won, diplomats said. Residents in the reclusive communist state were told they have until Sunday to exchange a limited amount of old bills, they said.

The news sent Pyongyang residents rushing to the black market to convert hoarded bills into US dollars and Chinese yuan, South Korea's Yonhap news agency reported, citing unidentified North Korean traders operating in neighbouring China.

Shops, bathhouses, barber shops and restaurants have closed, activists said.

"We heard business and market activities were all suspended," said Lee Seung-yong, an official at Good Friends, a Seoul-based civic group that sends food and other aid to North Korea. "People have no money to engage in business."

Authorities have threatened "merciless punishment" for anyone violating currency exchange rules, Good Friends said.

The overhaul of the North Korean won – the most drastic in 50 years – aims to curb runaway inflation and clamp down on the street markets that have sprung up in the tightly controlled nation, analysts said.

Unable to feed its 24 million people, the regime began allowing some markets in 2002, including farmers' markets.

The markets may have encouraged trade but they also brought in banned goods such as films and soap operas from South Korea, threatening leader Kim Jong-il's totalitarian rule, analysts said. The country's largest wholesale market, in Pyongyang, reportedly closed in June.

With the currency overhaul, the government is retaking control of the economy from merchants, analysts said.

"This is aimed at rooting out the budding private sector," said Jeong Kwang-min, a research fellow at the Institute for National Security Strategy in Seoul, adding that the move has a broader goal: to pave the way for Kim Jong-il to hand power to his youngest son, Kim Jong-un, and to ensure he inherits a stable economy.

Kim, 67, has led North Korea since 1994 but he is said to have suffered a stroke in August 2008.

The country has endured economic turmoil since the collapse of the Soviet Union and flooding and economic mismanagement in the mid-1990s. North Korea since has relied on international food handouts and aid negotiated in exchange for promises to dismantle its nuclear programme.

Much of that aid has been suspended, and international sanctions tightened, because of Pyongyang's nuclear defiance.

The currency overhaul comes just days before President Barack Obama's envoy on North Korea visits Pyongyang to try to persuade the regime to return to nuclear disarmament talks.

North Korea announced on state radio that the exchange rate would be set at 100 old won to 1 new won, one foreign diplomat said. Residents will only be allowed to exchange 150,000 won for the new currency, according to South Korea's Joong Ang Ilbo newspaper and other media outlets monitoring North Korean radio.

Cash in excess of the allowed amount must be saved in government-run banks, but it was not clear if residents could change that money into new bills, according to South Korean media.

A stampede in Hoeryong, in the north-east, nearly forced the suspension of trains, with guards blocking the entrance to a bank in the city, the Seoul-based Network for North Korean Democracy and Human Rights said, citing unidentified sources.

In North Hamgyong province, a merchant couple in their 60s killed themselves after hearing of the revaluation, said the Daily NK, a Seoul-based online news outlet that focuses on North Korean affairs.

Yoo Ho-yeol, a North Korea expert at Seoul's Korea University, said he did not expect any further drastic measures. He said: "Other kinds of private economic enterprise will eventually spring up again."