New book confirms radical changes to North Korean foreign exchange rate system
In any other country this would be the first sentence in a beginner’s textbook on foreign currency markets, but in the DPRK, this marks a major admission of the central role that markets play in North Korean life.
The book, published by the Scientific Encyclopedia Publishing House in March and entitled “The Methodology of Monetary Issuance and Monetary Adjustment,” has a lot to tell us about the future of market-oriented reforms under Kim Jong Un.
Contrary to inferences drawn from other sources, this book indicates a level of consolidation and commitment to the use of market mechanisms in the management of the economy, and speaks to the leadership’s willingness to accept markets over central planning in a growing number of areas.
North Korea is a country where the word ‘market’ is rarely used in official publications, and where markets remain at the alleged margins of the economy.
The fact that some of the country’s top minds in monetary economics openly admit the existence of a market-oriented exchange rate that is in widespread usage is a dramatic signal of just how serious the government is about reform.
This has the hallmarks of naked and all-encompassing state capitalism, without private firms or private property outside the household, with a side-order of state socialist planning alongside.
FX WON AND THE 100 WON RATE
Visitors to North Korea have long noticed the country has more than one exchange rate. Foreigners will likely have encountered two, one set by the country’s Foreign Trade Bank (FTB), and another set by the Central Bank (CB).
The former, FTB rate, is widely used in hotels, FX shops, and other places frequented by tourists and travelers. Many Foreign Trade Companies (FTCs) have the right (and/or obligation) to sell goods and services at this exchange rate, and the Dollar usually trades at around 105-110 on the won.
Visitors often also note that they cannot buy won at this rate, but that’s because it is not actually an exchange rate at which you buy and sell physical money: FX Won was long believed to only be used for accounting purposes.
The book confirms that theory: there is a separate, virtual Won, known as the Foreign Exchange Won (FX Won; 외화원), and that reference is then used to calculate prices for customers using FX stores, hotels and other shops that take FX directly.
It says, directly, that “this exchange rate is usually only used for calculation purposes,” not to buy/sell foreign currency for North Korean Won, and it is also used as the unit of accounting for the Foreign Trade Bank and for foreign accounts kept there by enterprises and other state organizations.
THE BLACK MARKET GOES LEGAL
Originally, there were two exchange rates in North Korea. There was the rate that the state officially set, and then there was the “black market rate.”
In the 1990s, a large spread opened up between them, and this was one of the reasons for the 2002 Economic Improvement Measures and the latter 2009 currency reform.
Even as late as 2013, North Korean official publications would not admit that a market-linked, official exchange rate existed or should be allowed to exist.
Despite this, any visitor to the country’s Kwangbok Area Supermarket or the Tongil Market, among many others, will have noticed that Korean Won (KPW) can be bought at around 8000 won to the U.S. dollar — a rate often identical or nearly identical to the market exchange rates published by Daily NK and Asia Press.
The latter was widely believed to be the “black market rate,” but if that’s the case, why are state-owned enterprises openly offering to buy foreign currency from foreigners on officially-sanctioned tours to the country?
The publication not only admits the existence of an official exchange rate linked to foreign and domestic market prices, but even gives us a rough idea of how that link is created.
The Central Bank is tasked with setting the Cooperative Exchange Rate, and uses “domestic market prices” – not domestic state-set wholesale/retail prices – and foreign market prices.
In addition, the Central Bank’s calculations take into account the supply of and demand for foreign currency.
This implies that shops selling at this rate are selling at domestic market prices, and represents the Central Bank’s approximation of what the Won exchange rate should be, given market factors both at home and abroad.
This may explain why the rate differs somewhat from the market exchange rates published elsewhere, because the Cooperative Exchange Rate represents the Central Bank’s efforts to compensate for price differences between the domestic and foreign markets, and the relative demand for currencies on the North Korean market compared to the global market.
The book makes clear that this is the rate at which foreign currency should be bought and sold, in order to maximize the state’s holding of forex and to curtail the circulation of forex in the domestic market.
But that’s not all. There is also a “State Standard Rate” that the central bank also sets. This author has never actually encountered this rate, but it appears to be the replacement for the old official rate.
Unlike the “Cooperative Exchange Rate,” this rate is calculated from two sources: foreign market prices and state-set domestic prices (state-set wholesale and retail prices).
North Korea still has partially planned economy, though many prices are now set by enterprises themselves under ‘order contracts’, this means that at least some prices for inputs and for commodities are set by the state.
The price at which these goods are bought and sold in is set by the state, and then these prices and international market prices are used to determine the exchange rate.
The exact process by which such determinations are made is not spelt out in the book, but South Korean research suggests that state wholesale prices have been benchmarked with domestic market prices in the recent past.
Perhaps, then, the spread between the State Standard Rate (SSR) and the Cooperative Exchange Rate (CER) is not all that large.
The author of the book does state that the gap between the two needs to be narrow so that SSR can be used as the basis to set the CER. It’s an open question whether the SSR is actually used for anything else except as a reference in setting the CER.
FORCE FOR GOOD?
The book goes on to say that the CER should be used for the buying and selling of foreign currency in order to ensure that the state is able to able to make use of idle domestically-held FX
The author openly argues that by seeing FX as a commodity to be freely bought and sold will help the state to concentrate FX in its hands and alter the supply and demand for FX.
Further, they say, it will enable the state to stymie the circulation of FX domestically, and the acceptance of the market exchange rate and market prices is part of a grander economic project to rebuild the state economy using the resources of market actors and market prices.
It nonetheless represents a dramatic improvement on state socialism, and if other areas of economic policy – especially investment policy – and the sanctions situation improves, these kinds of measures may help to encourage economic growth and better lives for North Koreans.
Edited by Oliver Hotham
Featured image: NK News
In any other country this would be the first sentence in a beginner's textbook on foreign currency markets, but in the DPRK, this marks a major admission of the central role that markets play in North Korean life.