What’s Up with North Korea’s Skyrocketing Exchange Rates?
In recent months, foreign exchange rates in North Korea have surged in ways that intuitively make little sense. The Korean People’s won (KPW), the country’s domestic currency, now trades at 16,100 to the dollar in Pyongyang—the highest recorded rate since Daily NK began tracking it in 2009. This marks a 92 percent increase over the past year, and a nearly 90 percent increase in just six months. The Chinese renminbi (RMB) rate has also increased, but less sharply, by 35 percent in the past six months.
How can we explain this seemingly strange puzzle? Several factors appear to be at play. One is the reopening of trade after the pandemic, although current trade levels do not fully account for the sharp rise in exchange rates. North Korea’s trade with China, its largest trading partner by far, has only recently begun to recover, reaching 82 percent of pre-pandemic levels in 2023. Another factor may be Kim Jong Un’s “20×10 Policy,” which aims to build modern factories in 20 rural cities and counties each year for the next ten years, requiring substantial imports of industrial goods. Increased trade with Russia could also be contributing, although it is unclear how much of North Korea’s arms exports are paid in cash versus in-kind with other goods.
Even when combined, these factors do not fully explain the scale of the exchange rate rise. The most significant factors seem to be human psychology and market expectations. Expectations play a crucial role in setting exchange rates: if people anticipate the domestic currency will lose value, they tend to shift their holdings to foreign currency, and vice versa. In this case, expectations of a broader reopening of trade have likely fueled much of the KPW’s depreciation. When the market anticipates increased trade, more foreign currency is needed to pay for imports, causing the KPW to lose value.
Ironically, government policies aimed at stabilizing the exchange rate closer to the official level seem to be having the opposite effect. Authorities recently issued a sternly-worded directive instructing everyone to work to stabilize exchange rates. The document blames “unfounded rumors” and unrealistic expectations for driving up rates and calls for the “eradication” of foreign currency hoarding. Predictably, it also mandates that all individuals and workplaces adhere strictly to the official exchange rate, while blaming black market currency traders operating outside state control.
The problem for the government is that its official exchange rate of 8,900 KPW to the dollar is wildly unrealistic, set at about 50 percent of the “real” black market rate of 16,100 KPW. This discrepancy inevitably encourages continued trading at the much higher black market rate, given the opportunities for arbitrage. In response, the state has ramped up its crackdown on illegal money changers, ordering the confiscation of goods and cash from anyone caught trading foreign currency at rates above the official level. These measures only heighten market anxiety, prompting more people to hoard foreign currency, which in turn pushes the rate higher as expectations grow that the crackdown will make dollars even more scarce.
The recent history of exchange rate fluctuations also suggests that the state’s repressive measures might be adding fuel to the fire. Exchange rates dropped sharply during COVID-19 border closures, and the North Korean won against both the dollar and renminbi as trade with China picked up in early 2023. Political signals at the time also hinted that trade with Russia could increase. Much of the stability then was likely due to state-driven monetary policy, with the government possibly limiting the supply of KPW to keep rates stable. An influx of foreign currency from increased trade may have also played a role. However, the state’s ability to control monetary policy is limited. Its reserves of foreign currency are small and tightly controlled, and a strict monetary policy could lead to reduced consumer spending and even deflation.
Over time, exchange rates are likely to stabilize. As the market’s expectations of sharply increased trade fail to materialize, demand for foreign currency among firms and individuals will likely decrease. However, if the state’s aggressive crackdown on illegal currency exchange continues, hoarding could persist regardless of actual economic conditions. Only time will tell, but it is clear that the state has relatively few realistic tools at its disposal.