North Korea has moved to strongly crack down on potential “negative effects” caused by the floating of government bonds last month, including the forming of a new law enforcement “group” to crack down on illegal foreign currency transactions, Daily NK has learned.
The bonds were issued in mid-April to collect foreign currency circulating in the country. There are reportedly concerns among North Korean government officials that the bonds could cause a sudden increase in currency exchange rates which, in turn, could lower the value of the North Korean won.
NORTH KOREA’S NEW FOREIGN CURRENCY POLICE: GROUP 1118
According to a Daily NK source in North Korea on Monday, North Korean authorities recently created a group to crack down on price gouging in the sale of foreign currency (namely, selling foreign currency at an exchange rate higher than that set by the state) along with enforcing a ban on the large-scale buying and selling of foreign currency by individual currency brokers.
The new team, called the Group 1118, consists of members from the local offices of Ministry of State Security (MSS) and the Ministry of People’s Security (MPS), along with members of the law enforcement divisions of local people’s committees. Members of this new group reportedly monitor the activities of the foreign currency brokers registered with local police stations.
Group 1118 officials can arrest any foreign currency broker who is caught buying or selling USD on-the-spot and suspects can be detained in facilities outside of their area of residence.
In the past, similar law enforcement teams were only able to “expose” (적발) cases of illegal foreign currency transactions; investigations have traditionally been conducted by local law enforcement agencies where the infractions were committed.
In contrast, officials connected to Group 1118 have been granted the authority to arrest and investigate suspects and even detain them. This measure was introduced to help combat corruption among local law enforcement officials who would accept bribes from currency brokers to avoid punishment.
Ultimately, the North Korean government’s efforts to exert more control over currency brokers appears to be part of an attempt to prevent the sharp rise in exchange rates since public bonds were floated last month.
In mid-April, North Korea issued two types of public bonds: one targeted at state-run organizations (such as construction companies) and another aimed at the donju, North Korea’s wealthy entrepreneurial class.
North Korea has reportedly designated 60% of the total bonds printed for state-run organizations, while the remaining 40% are reserved for the donju.
In response to these measures and in anticipation of a fall in circulation of USD, North Korean elites have reportedly rushed to purchase dollars from currency brokers at inflated prices.
BROKERS CONTINUE THEIR BUSINESS ACTIVITIES…VERY QUIETLY
Daily NK’s source said that currency brokers have refrained from conducting much of their work since Group 1118 was created.
“Because of the crackdowns, the currency brokers can’t do their traditional business in the markets,” the source said. “They can come out to buy other things, but Group 1118 agents closely follow them around.”
In response to this situation, currency brokers are reportedly conducting their business mainly through mobile phones and using proxies where needed. Brokers are also limiting their business to customers they already trust because of the risks of seeking out new customers who could be undercover Group 1118 agents.
North Korean authorities are also cracking down on the printing and distribution of counterfeit dollars. North Korean authorities have long turned a blind eye to the printing and circulation of counterfeit currency because these activities were generally conducted under the aegis of the MSS or MPS.
The floating of public bonds, however, has led to decreased circulation of foreign currency in local markets. The government appears to be concerned that more counterfeit dollars will come into circulation and is cracking down on counterfeit currency printers and distributors.
Although the circulation of counterfeit dollars might temporarily lower exchange rates, such activities could erode trust in the value of the currency and the North Korean won could fall greatly in value over the long-term.
PUBLIC BONDS: A “STABILIZING FACTOR”
Meanwhile, North Korean authorities reportedly view the floating of the public bonds as a stabilizing factor for the country’s finances because the central government does not need to provide as much cash to state-run organizations compared to the past.
The authorities anticipate, however, that the bond flotation will not allow them to collect as much foreign currency as they originally wanted.
“The donju are reluctant to purchase government bonds with foreign currency,” said the source. “Who would want to trade in their dollars for a piece of paper [a bond]?”
One development demonstrating the difficulty of selling the bonds is a renewed attempt to collect foreign currency from ordinary people.
According to Daily NK’s source, a 30% discount is being provided to market merchants when they trade in their dollars for North Korean won at state-run foreign currency exchanges located near the entrances to the country’s official markets (“General Markets” or 종합시장) or at state-run banks.
North Korean officials are also reportedly planning to conduct a review (총화) of the impact the public bonds.
“The central bank has issued about half the number of bonds it plans to sell,” the source said. “Depending on the conclusions of the review – along with how many bonds the state has sold by the third quarter of this year – officials plan to either reduce or increase the number of bonds to be issued.”
*Translated by Violet Kim
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