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Last month we discussed attempts by the North Korean government to suck foreign exchange deposits into the banking system and the evasive strategies adopted by enterprises to limit their exposures. More recent reporting by the Daily NK and Good Friends suggests that this pressure has now extended to households. Both sources report that transactions in foreign currencies have been banned by the authorities. Good Friends reports that in Pyongyang banks are now issuing foreign currency denominated debt cards which can be used, however, creating an incentive for people to turn in their foreign exchange. Thus far the practice appears to be largely if not exclusively limited to Pyongyang.
While the scheme might work at the retail level, it is harder to imagine it working at the wholesale level, especially insofar as the actual wholesale purchases of consumer goods are largely done in China and there is no particular reason to expect that Chinese merchants would readily accept this form of payment. The net result is likely to be disrupted supply and worse financial terms for the North Korean importers. The Good Friends account goes so far as to cite unnamed traders in China as expressing the view that like the foreign currency ban introduced as part of the November 2009 currency reform, that this latest attempt to ban the use of foreign exchange in what appears to be a dollarizing economy will “peter out” as occurred during that earlier episode.
It is said that the currency ban reflects Kim Jong-il's dying wish. Be prepared for plenty more such "dying wishes" before Kim Jong-un takes public ownership of policy decisions.
