Multiple sources in North Korea told Daily NK recently that because of the constant rise of exchange rates this year, public demand for foreign currency has increased while market vendors also prefer transactions to be conducted in foreign currency.
Due to the higher exchange rates diminishing the value of the North Korean won, market vendors prefer not to accept the local currency in exchange for their goods.
“The exchange rates sometimes jump several hundred won all at once. Vendors require a premium for won-denominated transactions. When one yuan is selling for 1,800 won, for example, they might charge 1,900 won per yuan, relative to the price. That’s the only way vendors can avoid a loss when exchange rates are rising so fast,” said a source in Ryanggang province.
In other words, North Korean merchants apply a higher exchange rate than the going rate when selling items for Korean won to offset potential loss on the rapidly depreciating won.
“Back when the border was locked tight during the pandemic, not only rice and corn but most products were bought for Korean won, but now everything can be bought with Chinese yuan. Everybody is using foreign currency because vendors would rather get dollars or yuan,” a source in North Pyongan province said.
‘Re-dollarization’ of North Korean markets
Trade restrictions during the pandemic reduced the demand for foreign currency in North Korea, leading to a decline in exchange rates. Consequently, this resulted in the de-dollarization of North Korean markets. However, the significant rise in exchange rates this year is prompting a re-dollarization of markets.
In Sinuiju, Uiju county and other parts of North Pyongan province that are adjacent to China, smuggling was rampant before the border was closed because of COVID-19. As a consequence, Chinese-made items were frequently sold in marketplaces there, and the dollar and yuan usage rates were higher there than elsewhere in North Korea.
But in rural areas that are not close to the border, it was uncommon to purchase rice and other domestic agricultural products with yuan at marketplaces until last year.
To be sure, market vendors have always preferred receiving dollars or yuan for purchases of imported factory goods or Chinese food products. However, North Korean won used to be generally accepted for items produced inside North Korea.
With the surge in foreign currency exchange rates this year, buying rice and corn with foreign currency has become commonplace, even in the rural markets of North Pyongan province where smuggling does not play a role. Due to the ongoing depreciation of the domestic currency and the rise of foreign currencies, merchants trading in domestic agricultural products are finding it profitable to be paid in foreign currency.
It has become more common for merchants to reject Korean won. Purveyors of vegetables and hot meals used to accept domestic currency, but recently, more of them are insisting on being paid in yuan and pretend not to have enough money to make change for Korean won.
The North Korean officials who monitor market activity are supposed to prevent vendors from doing transactions in dollars or yuan, but given the increasing usage of foreign currency at marketplaces, enforcement of those rules has reportedly become perfunctory.
“Despite the rules, market vendors who are just trying to make a living aren’t eager to accept North Korean won at a loss. Since the enforcers can be fobbed off with a bribe, nobody is stupid enough to throw away good money by taking Korean won,” the source in Ryanggang province said.
Given these circumstances, more North Koreans are turning to money changers in the marketplace to convert their local money to foreign currency. It is nearly impossible to do their shopping if all they have is local money.
Currency spiral weakens state control over economy
In summary, the continual increase in exchange rates is leading to a higher use of foreign currency, which in turn is boosting the demand for it within North Korea. However, these trends may result in even higher exchange rates, according to experts.
“Growing usage of the dollar makes it harder for the North Korean authorities to exercise fiscal policy or control the domestic currency. Given the depreciation of the North Korean won, attempts to guide or force North Koreans to use the Korean won are unlikely to be effective,” said Son Gwang-su, an analyst with the KB Financial Group Research Institute.
But the economic shock caused by the depreciation of the North Korean won may not be as severe as during the currency reform in 2009.
“North Korea is currently hoovering up foreign currency through its electronic payment system and has set up more commercial banks to run that system. That may create the sense that currency policy is a little more manageable than during the currency reform of 2009,” Son noted.
“But since government policy won’t have much of an effect, the authorities will find it harder to control the economy as more citizens turn to foreign currency.”
Daily NK works with a network of sources in North Korea, China, and elsewhere. For security reasons, their identities remain anonymous.
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