SEOUL, South Korea (AP) — Before fleeing North Korea in 2014, Jeon Jae-hyun kept US dollars as a store of value and used Chinese yuan to make daily purchases at markets, restaurants and other places. He used the national currency, the won, only occasionally.
“There weren’t many places to use the won, and we actually had little confidence in our currency,” Jeon said during a recent interview in Seoul. “Even the quality of the North Korean banknotes was horrible as they often tear when we put them in our pockets.”
North Korea has tolerated widespread use of more stable foreign currencies like the US dollar and Chinese yuan since a failed revaluation of the won in 2009 sparked runaway inflation and public unrest.
So-called “dollarization” has helped dampen inflation and stabilize exchange rates, allowing leader Kim Jong Un to establish a stable grip on power after inheriting the role in late 2011. But the trend poses a potential threat to Kim because it has undermined his government’s control over the money supply and monetary policies.
The isolation of the pandemic has severely damaged the North’s economy, but still given Kim a chance to solidify social controls by restricting market activities and limiting the influence of capitalist and democratic South Korea. . Now observers say Kim is trying to reduce use of the dollar and yuan to tighten his grip on power as the North grapples with pandemic-related difficulties, longstanding UN sanctions and tensions with the United States.
“He has no choice but to strengthen the command economy because he has been locked in confrontations with the United States while maintaining the border closure,” said Lim Eul-chul, professor at the Institute of Far Eastern Studies at Kyungnam University in Seoul. “The current direction of the northern economy controls the markets more tightly, so there are still limits to dollar demands.”
It’s unclear what Kim would do because banning the use of dollars and yuan could backfire, causing confusion and angering the public, experts say. North Koreans are likely to resist attempts by authorities to take their foreign currency given the low level of public confidence in the government’s economic policies, said Choi Ji-young, an analyst at the funded Korea Institute for National Unification. by Seoul State.
The shift to using the dollar and yuan came amid economic turmoil and a famine in the 1990s that collapsed the state ration system, causing capitalist-like markets to emerge.
The revaluation of the won in 2009 led to an even wider use of foreign currencies. In an attempt to regain control over the nascent markets, authorities limited the amount of old banknotes citizens could exchange for new North Korean won, wiping out much of their household savings. Realizing that the local currency was unreliable, many began to store their savings in dollars and yuan.
Jeon, a former official from the city of Hyesan in northern North Korea, had two boxes of North Korean won bills totaling 2 million won at his home in 2009, about what it would cost then to buy 60 to 80 smuggled second-hand Japanese television sets. . Most of this money became worthless as authorities only allowed residents to exchange up to 200,000 won (about $60-70 at the time) per household in old notes for new money. .
“My money disappeared. I was extremely frustrated and embarrassed, but there was nothing I could do to protest,” Jeon said. “I saw many people crying and heard others fleeing to South Korea. .”
The yuan has since become the most widely used and preferred currency for savings in areas near the northern border with China. The dollar has become the most spared currency and the second most used currency after the won in southern regions, according to surveys of defectors.
Jeon said he used the yuan to buy clothes, rice and other necessities, eat at restaurants or pay bribes to bosses. Most of her savings were stored in yuan and dollars. He kept a small amount of North Korean won for occasions like donating money to village campaigns to support military units.
Paek HO, who left the city of Musan in northeastern North Korea in 2018, said she used yuan to buy expensive goods and won for cheap items such as sodas, vegetables and bread sold in the markets. About 50 professional money changers operate in Musan, she said.
“The use of foreign currency is officially illegal, but few have encountered any problems or been arrested for using it,” said Paek, 47. She requested that her first name be identified with initials, citing concerns for the safety of loved ones in North Korea.
There are two exchange rates for the won – an artificially high one set by the government and another set by the market which experts say more clearly reflects the country’s real economic conditions.
The won had stabilized around 8,000 to the dollar since 2012-2013, but suddenly strengthened sharply in 2020 when North Korea closed its borders to guard against COVID-19. According to North Korean watchdog groups, the won was trading on the street at around 6,700-7,000 to the dollar at the end of 2020; 4,600-7,200 in 2021; and 5,200 to 7,500 in the first half of 2022. Later in 2022, it fell back to around 8,000 won per dollar.
The value of the won has skyrocketed during the pandemic, likely because demand for dollars and yuan has plummeted due to border closures and tighter controls on the use of foreign currencies. These controls appear to have been applied inconsistently, though a lack of information from the Secret North makes it nearly impossible to get clear details.
Jeon said his relatives in Hyesan told him in phone calls that they were not allowed to use foreign currency in 2021, but could last year. Paek said his sisters in Musan told him last year that they used the yuan.
Kang Mi-Jin, a defector who runs a firm analyzing North Korea’s economy, said people in nearly 20 regions of North Korea voluntarily stopped using foreign currencies in 2021 during a campaign against the “anti-socialist elements” because of fears of possible sanctions. his contacts in North Korea, Kang said North Koreans are also keeping foreign currency as a safe haven.
The return of exchange rates to pre-pandemic levels likely reflects renewed demand for foreign currency amid speculation that North Korea may soon lift its COVID-19 restrictions. But many experts say less foreign currency is in circulation and the government is likely intervening to control exchange rates in the markets.
“Dollarization cannot be a long-term government policy because it’s like giving up sovereignty over monetary policy, even though it’s still true that it has helped the northern economy stabilize and grow. during the (previous) years of Kim Jong Un’s rule,” Lim Soo said. -ho, an analyst at the Institute for National Security Strategy, a think tank run by the South Korean spy agency.
He said Kim’s government was likely considering “very carefully” whether to fully reopen borders, as a sharp, full-fledged resumption of imports would cause the value of the dollar to rise sharply against the won, making imported goods more expensive. Dear.
Son Kwang Soo, an analyst at Seoul-based KB Research, said the North could try to keep the exchange rate within a narrow band of around 8,000 won to the dollar.
Defectors say an attempt to end the use of dollars and yuan would only cause chaos.
“Kim Jong Un will eventually leave ‘dollarization’ as it was. Nord told me that it’s even hard to find North Korean tickets now.”