‘Dollarization’ of North Korean economy, once vital, now potential threat to Kim’s rule

Jeon Jae-hyun, who escaped North Korea in 2014, once relied on U.S. dollars for wealth preservation and Chinese yuan for routine transactions, such as grocery shopping and dining out. The domestic currency, the won, was sparingly used due to its lack of acceptance and reliability.

“In our country, the won wasn’t widely accepted and we didn’t have much faith in our own currency,” Jeon mentioned in a recent interview in Seoul. “The quality of North Korean bills was so poor that they often ripped when we put them in our pockets.”

Since a botched revaluation of the won in 2009 led to rampant inflation and civil unrest, North Korea has allowed the use of more dependable foreign currencies such as U.S. dollars and Chinese yuan. This “dollarization” helped combat inflation and stabilize exchange rates, bolstering Kim Jong Un’s grip on power after he succeeded to leadership in late 2011. However, this trend also presents a risk to Kim’s rule as it compromises the government’s control over the money supply and financial policies.

The pandemic’s isolation has harmed North Korea’s economy but also provided Kim an opportunity to fortify societal controls by limiting market operations and curtailing influences from capitalist, democratic South Korea. Observers suggest that Kim is currently attempting to reduce the use of dollar and yuan to consolidate his power amid the ongoing challenges posed by the pandemic, enduring U.N. sanctions, and tensions with the U.S.

Lim Eul-chul, a professor at Kyungnam University’s Institute for Far Eastern Studies in Seoul, believes Kim has little choice but to reinforce the command economy due to ongoing confrontations with the U.S. and maintaining a closed border. “The current trend in North’s economy is towards tighter market controls, thereby limiting demand for dollars,” he explained.

However, experts are uncertain of Kim’s strategy, as an outright ban on the use of dollars and yuan could lead to public confusion and frustration. Given the lack of public confidence in the government’s economic strategies, North Koreans are expected to resist any attempts by the authorities to seize their foreign currency, says Choi Ji-young, an analyst at the Korea Institute for National Unification in Seoul.

The shift towards using dollars and yuan took place amidst economic chaos and a famine in the 1990s, which led to the collapse of the state rationing system and the rise of capitalist-like markets.

The revaluation of the won in 2009 resulted in increased use of foreign currencies. In an attempt to regain control over the emerging markets, the authorities restricted the volume of old bills that could be exchanged for new North Korean won, effectively wiping out a significant portion of the citizens’ savings. The unreliability of the local currency prompted many to begin storing their savings in dollars and yuan.

In 2009, Jeon had 2 million won in his possession, equivalent to the cost of 60-80 second-hand Japanese TVs. Most of this money became worthless due to the currency exchange limitations set by the government.

“All my money disappeared. I felt helpless and humiliated but could do nothing to resist,” Jeon recalled. “I witnessed many people in despair and heard of others escaping to South Korea.”

In regions close to the North’s border with China, the yuan has since become the most used and preferred currency for savings. According to surveys of defectors, the dollar has emerged as the most saved currency and the second most-used currency after the won in southern regions.

Jeon used yuan to buy necessities, dine out, and even bribe superiors. His savings were mostly kept in yuan and dollar bills, with a small amount in North Korean won used for donations to village campaigns supporting military units.

According to Paek H.O, who defected from the North Korean town of Musan in 2018, she used yuan to purchase expensive goods and won for cheaper items like sodas, vegetables, and bread. Despite the official illegality of using foreign currency, arrests were rare.

North Korea has two exchange rates for the won: one artificially inflated rate set by the government and a market-determined rate that experts believe reflects the actual economic conditions in the country more accurately.

The won had been stable at around 8,000 per dollar since 2012-2013 but strengthened in 2020 due to North Korea’s border closure in response to COVID-19. However, its value fluctuated and later returned to about 8,000 won per dollar in 2022.

The pandemic caused a surge in the won’s value, likely due to a decrease in demand for dollars and yuan as a result of border closures and stricter regulations on foreign currency usage. However, information about these controls remains unclear due to North Korea’s secretive nature.

Reports from Jeon’s relatives in Hyesan and Paek’s sisters in Musan reveal inconsistencies in the enforcement of foreign currency use restrictions over the past couple of years.

Kang Mi-Jin, a defector who analyzes North Korea’s economy, reported that people across nearly 20 regions in North Korea voluntarily stopped using foreign currency in 2021 during a campaign against “anti-socialist elements,” fearing possible punishment. However, they still held onto foreign currency as a safety net.

The return of exchange rates to pre-pandemic levels likely suggests a revived demand for foreign currency amid speculation that North Korea might lift its COVID-19 restrictions. However, experts suggest that less foreign currency is in circulation and that the government is likely intervening to control exchange rates in markets.

“Dollarization isn’t a viable long-term policy for the government, as it essentially means surrendering control over monetary policy. However, it did help stabilize and grow North Korea’s economy in the early years of Kim Jong Un’s rule,” said Lim Soo-ho, an analyst at the Institute for National Security Strategy.

Analysts speculate that North Korea might be aiming to keep the exchange rate within a narrow band of around 8,000 won per dollar. However, attempts to end the use of dollars and yuan could result in chaos, according to defectors.

“Kim Jong Un will eventually revert to dollarization. If he prohibits the use of foreign currency, it would disrupt the country’s monetary circulation,” Kang noted. “My contacts in North Korea informed me that it’s even difficult to find some North Korean bills now.”