North Korea announced its currency redenomination to residents via internal broadcasting systems on November 30th, and started exchanging money across the board on the 2nd of this month. On the 1st, only in parts of some neighborhoods in Pyongyang did it go according to plan. While the cause of the delay is not known, there is a high possibility that the authorities were rushing to set up additional measures overnight following residents’ aggressive reactions to the news.
On the 2nd, the authorities announced that each household would be permitted to exchange 100,000 won at a 100:1 rate and more than that 100,000 won at a 1000:1 rate. Therefore, the majority of residents’ property turned straight to trash, except for just 100,000 won.
Experts explain that this action was designed to curb inflation and bring out money accumulated in residents’ closets. It is not entirely false. North Korea has been in a nonsense situation for a while, whereby the unrecognized private economy is developing much better than the moribund state one.
However, there is a low possibility of controlling inflation with redenomination when the economy is suffering from a chronic shortage of all kinds of materials and the inbuilt distortion of social mobilization programs are causing harm across the board.
The move may also have the effect of revealing hidden money in private homes. In order to achieve that, the authorities are encouraging the people to deposit their money into the bank, but they already have had experience of their money being confiscated by the bank, so the people rightly will not believe what the authorities say this time.
In 1992, the bank accepted 20,000 won of private money, but did not subsequently permit the depositors from withdrawing any of it until March of the next year. The bank thereafter allowed them to withdraw only 4,000 won per household, and withheld the remainder.
However, these explanations are not enough. This is because Kim Jong Il values self-respect and national prestige highly. Even though the North’s economy is already on the brink of collapse and the country is considered a rogue in international society, he has claimed that North Korea will become a strong and prosperous state by 2012.
Additionally, he could have simply used physical force to smash the private economy rather than a complicated currency policy!
The real core problem is that Kim Jong Il’s self-esteem has been damaged a lot by currency depreciation. In trade with China, which amounts to more than 70 percent of North Korea’s trade with foreign countries, the North Korean won has already lost its role as a medium of exchange. The North Korean won is worth nothing overseas. Therefore, traders generally use Yuan or U.S. dollars.
Since the 2002 July 1st Economic Management Reform Measure, according to the official exchange rate, one dollar was previously worth 140 won, but in the jangmadang, it is 3,800 won.
So, it is likely that Kim Jong Il is trying to recover this currency depreciation through the redenomination. It looks like a strategy to maintain his system and protect his prestige. However, the only victims of his reckless greed will be the people of North Korea.