The North Korean Economy, October 2019: Are Sanctions Causing a More Volatile Exchange Rate?


The stability of North Korean exchange rates has been a longstanding puzzle for economic experts on the DPRK. Even with harsh sanctions and “maximum pressure” in place, market exchange rates of the North Korean won with US dollars (USD) and Chinese renminbi (RMB) have been remarkably stable. However, there are signs that North Korea’s exchange rate with the dollar has become slightly more volatile, while the exchange rate between the won and the RMB remains relatively stable. If the North Korean government has indeed been successfully shoring up the won, that ability may be starting to weaken somewhat, though we do not have enough data points to draw any firm conclusions. Nor is it clear yet that sanctions have finally started to affect exchange rates. Continued volatility in the US dollar exchange rate, however, may be evidence that sanctions are making the country’s foreign currency situation increasingly difficult.

Exchange Rate Stability

As the graph below shows, exchange rates for North Korean won to US dollars from early 2016 until several months ago remained stable, notwithstanding the turbulent conditions on the Korean Peninsula.

Graph 1. North Korean won (KPW) to US dollars (USD), average of three cities (Pyongyang, Sinuiju and Hyesan). Data source: Daily NK. Graph by Benjamin Katzeff Silberstein.

Throughout 2017, for example, when the international community levied multiple rounds of harsh sanctions on the North Korean economy, the exchange rate did not change notably. The government may have been taking measures to counteract drastic changes in the exchange rate—such as forcibly fixing exchange rates on the markets and, more likely, contracting the supply of the North Korean won by simply printing less of the currency. That said, the USD exchange rate is not the best measurement of overall economic volatility since the biggest holders of USD in North Korea are likely major state enterprises, government entities and a relatively small number of elite individuals. Thus, fluctuations in this particular exchange rate wouldn’t necessarily be representative of general public anxiety about the country’s economic situation. Nonetheless, if there were high anxiety in the market, we should have seen at least some drastic changes in exchange rates. But for most of the period as a whole, the exchange rate changed by a small average of -1.15 percent. Compared with later periods, as we shall see, the standard deviation is relatively low at 130.[1]

As the graph below illustrates, the exchange rate for RMB has also remained remarkably stable throughout the turbulence for North Korea. On average, the exchange rate changed by only -0.08 percent. In reality, the number may well be much higher since exchange rates probably change in between the data observations by Daily NK. The standard deviation is 52, lower than for the USD.

Graph 2. North Korean won (KPW) to Chinese renminbi (RMB), average of three cities (Pyongyang, Sinuiju and Hyesan). Data source: Daily NK. Graph by Benjamin Katzeff Silberstein.

How Is North Korea Maintaining Stable Exchange Rates?

Over the past few months, the exchange rate for the US dollar appears to have become more volatile. Graph 1 showed that the swings in exchange rates appear to get significantly broader from 2018 and onward, particularly in the latter part of the year. The following graph shows the KPW-USD exchange rate since the fall of 2018.

Graph 3. North Korean won (KPW) to US dollars (USD), average of three cities (Pyongyang, Sinuiju and Hyesan). Data source: Daily NK. Graph by Benjamin Katzeff Silberstein.

Looking at the standard deviation, we see clearly that volatility is higher for this period than for the longer stretch from 2016. The standard deviation for the period is 182, significantly higher than the 130 for the KPW-USD exchange rate from 2016. Meanwhile, the RMB has remained stable throughout the same period. The average change is significantly higher than for the 2016-present period, but still not very volatile, at -0.3 percent. The standard deviation is 41.

North Korea’s exchange rates have been stable at least partially because the government has likely shored up the exchange rate by keeping the supply of won very tight, and perhaps also through currency controls. We don’t actually know how the government regulates the exchange rate of the won, though there are strong reasons to believe, as Peter Ward and I have argued, that the won is somehow pegged to the RMB. Precisely how such a peg would be upheld, other than a tight supply of the won, is a big mystery. In a regular economy, the central bank would try to maintain its target exchange rate by, among other things, using its foreign currency reserves to buy domestic currency to keep the price from dropping below the target. The North Korean government may have been taking measures like this but it is unlikely that it has been enough since its foreign exchange reserves are low to begin with.

Graph 4. North Korean won (KPW) to Chinese renminbi (RMB), average of three cities (Pyongyang, Sinuiju and Hyesan). Data source: Daily NK. Graph by Benjamin Katzeff Silberstein.

What explains the heightened volatility of the dollar, and the relative stability of the RMB? The USD and the RMB fill different functions in the North Korean economy. The dollar is much more of an elite currency and is not widely held by the general public. Part of it is due to international fluctuations on exchange rate markets. Interestingly, the exchange rate of RMB for USD inside North Korea often follows the same general trend and direction as the international rate. Although the North Korean economy is in many ways closed off from global markets, international changes affect exchange rates. The following graph shows the exchange rate of RMB to USD on international markets, and that of North Korea, respectively.[2]

Graph 5. RMB-USD exchange rates on international markets and the North Korean market respectively, calculated into monthly averages. Data source for North Korea data: Daily NK. Data source for world data: Federal Reserve Bank of St Louis.

Exchange rate swings are much starker in North Korea than in the rest of the world. In addition to global exchange rates, there are other factors that have an impact on the DPRK’s exchange rates. The sharpness of exchange rate swings in North Korea suggests that the supply and demand for foreign currency reacts in a much more dramatic and exaggerated manner to much smaller exchange rate changes in the outside world, though, curiously, the USD appears to be consistently lower in RMB terms in North Korea than in the rest of the world. For example, the increase in the RMB-USD rate in North Korea beginning in July of this year is significantly higher than the global increase. Daily NK reported the exchange rate increase around the time that it happened, and its sources suggested that the depreciation of the won was caused by difficult conditions on the domestic markets as a result of sanctions.


It may be that the North Korean government’s USD reserves are shrinking at a higher rate than before and that the impact of sanctions on exchange rates is finally visible in the data. Anecdotal information does indeed suggest that the North Korean regime is demanding stricter accounts of USD assets among enterprises, as one source with contacts in the Pyongyang business world told the author. It could also simply be that the global appreciation of the US dollar against the RMB is making it more difficult for those who hold US dollars in North Korea to keep up with the price changes in imported goods. It is impossible to reach any definitive conclusions about what accounts for higher-than-usual exchange rate changes between the won and USD. But continued erratic increases in the US dollar exchange rate may be tangible evidence that sanctions are making the country’s foreign currency situation increasingly more difficult.

  1. [1]

    The standard deviation is a measurement of variation among a group of numbers, showing variation from the mean among the numbers. A low standard deviation indicates relatively little disparity among the numbers, while a higher figure connotes higher disparity.

  2. [2]

    The figures are calculated as monthly averages from all observations in a certain month in North Korea, and as averages from biweekly figures for the RMB-USD exchange rate.

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