An exclusive Daily NK report that even low denomination

transactions in North Korean markets now regularly take place in foreign

currency rather than the country’s own

Korean People’s Won (KPW) offers fresh

evidence of the grave threat that hard currency usage poses to North Korea’s fiscal sovereignty.

According to internal North Korean sources, in recent times

transactions have started to take place entirely in Chinese Yuan (RMB). When

100 Yuan is presented in payment, the transaction is computed at the daily

black market exchange rate and change is then provided in 10 and 1 Yuan bills.

This is a new development; previously, it was the absence of small denomination

bills and coins that precluded completing transactions in hard currency.

According to sources nearer Pyongyang, payments for private

tutoring in English and Chinese in the capital are also frequently paid for in

foreign currency, notably U.S. Dollars. Back on March 11th, Daily

NK also reported that payment for trips by “servi-cha” or private bus are also being done in

hard currency in the modern era.

The cause of these changes is clear. Ever since the North

Korean authorities implemented an economically ruinous flash currency

redenomination on the morning of November 30, 2009, the public’s preference for foreign currency holdings

has grown all the more intense, and the value of the KPW has gone into

concomitant deep decline.

Reviewing this slow but steady push for more and more hard

currency transactions, South Korean experts declare it a grave threat to the

fiscal sovereignty of the North Korean state. The problem is not merely the

2009 currency redenomination, they say; evidence of fiscal incompetence and

widespread malfeasance on the part of the authorities becomes clearer with

every economic policy that fails to take off. Popular suspicion of domestic

currency increases in lockstep, and the desire of people to hold hard currency

grows.

Official policy calling for restriction of foreign currency

transactions, which periodically emerges, does not have the desired effect of

limiting usage, either. On the contrary, it drives the preference for hard

currency holdings.

Cho Bong Hyun of the IBK

Economic Research Institute told Daily NK, “The currency

redenomination was a big shock, trust in the authorities’ policies has declined, there is concern over the dangers of

inflation, and therefore faith in local currency has dropped. It’s a vicious circle. If they are going to resolve this they will need to

implement a credible currency policy, but they aren’t going to do that.”

“They

have to show that they have the capacity to solve the country’s economic woes, but that is not easy when

you haven’t

got any hard currency reserves and you are finding it tough to attract

investment,” he went on. “In the absence of some form of reformist

change in the economic sphere, they will not stop this declining faith in

domestic currency no matter what they do.”

Korea Rural Economic

Institute (KREI) Vice-president Kwon Tae Jin agreed, saying, “Most North

Koreans survive off trade, and most people are increasingly aware of problems

with the KPW; so hard currency usage is rising accordingly. The news that small

change is being given in foreign currency makes it abundantly clear that state

attempts to crack down on this phenomenon have failed completely.”

“This is not a political problem. If they don’t open their

economy to the outside and implement a basket of measures to improve matters,

then this problem will never be solved,” Kwon predicted.