North Korean demolishes the Inter-Korean Joint Liaison Office in Kaesong on June 17.
After North Korea closed its border with China following the outbreak of COVID-19, North Korea-China trade, including both imports and exports, has fallen to practically zero. The economic sanctions on North Korea, which began to bite in 2017, caused its trade with China to collapse, and the COVID-19 crisis has added an additional shock. Analysts think the North Korean economy is in danger of being paralyzed with the flow of materials needed for economic activity cut off. North Korea’s economic crisis is seen as one of the factors behind its demolition of the Inter-Korean Joint Liaison Office in the Kaesong Complex, which may have been designed to pressure the international community to ease sanctions.
Figures from the Korea International Trade Association (KITA) and Chinese customs authorities reviewed on June 18 show a major drop in the value of North Korean goods being exported to the Chinese market: US$10.7 million in January and February (-71.7% year on year), US$600,000 in March (-96.2%), and US$2.2 million in April (-90%). The value of North Korean exports to China, which stood at US$2.63 billion in 2016, has fallen since economic sanctions were toughened, decreasing to US$1.65 billion (-37.3%) in 2017 and US$195 million in 2018 (-88.2%). Exports rebounded in 2019, to US$285 million, but that was still less than a tenth of the value of exports in 2016.
After plunging almost every year since 2017, exports have now been nearly halted altogether by the closure of national borders. Experts on the North Korean economy who spoke with the Hankyoreh on Thursday said the country’s experts on China appear to have remained close to zero in May as well.
But imports are having an even more serious impact on the overall activity and operation of the North Korean economy. Even after tougher sanctions went into effect, North Korea’s imports of Chinese products (raw materials, energy, and food) had remained fairly steady, compared to the plunge in exports: imports were valued at US$3.19 billion in 2016 and ranged from US$2.22 billion to US$3.33 billion between 2017 and 2019.
In fact, the sanctions against North Korea, which are primarily intended to prevent the North Korean authorities from acquiring US currency, are focused on exports. Aside from a few products, including crude oil, commercial imports that are closely tied to the public livelihood aren’t subject to the tough sanctions.
But all that has changed this year because of the COVID-19 pandemic. The value of North Korean imports of Chinese products in January and February (US$197.2 million) was down by 23.2% from the same period last year, while March imports (US$18 million) were down by 90.8% and April imports (US$21.8 million) by 90.0%. North Korea’s total trade (imports and exports) with China was worth US$2.8 billion in 2019, less than half that of 2016 (U$5.8 billion).Flow of key materials cut off completely
Experts on the North Korean economy at the Korea Development Institute (KDI), the Bank of Korea, and the Korea Institute for Industrial Economics and Trade believe that the combination of economic sanctions and the coronavirus pandemic have plunged the North Korean economy into an unprecedented crisis.
“North Korea-China trade had already been drastically curtailed by economic sanctions since 2017. The closure of the national borders because of the coronavirus crisis this year has basically shut down trade between the two countries. What’s especially notable is that this has interrupted the supply of various materials necessary for the operation of the North Korean economy,” said Lee Seok, a senior analyst with the KDI, in the recently published May edition of the institute’s Review of the North Korean Economy.
March figures for the top five categories of products that North Korea imports from China show that the value of consumer goods (including cooking oil, wheat flour, textiles, cigarettes, and pharmaceuticals) had fallen by 13.2%-70.8% from the same month last year. “The North Korean economy depends upon Chinese imports for nearly all the basic materials needed for the operation of its economy, but there’s been an almost total interruption of imports of petroleum and other forms of energy, of foodstuffs, and of the machines, parts, and raw materials needed for manufacturing. The simultaneous shock of the sanctions and COVID-19 are precipitating a severe economic crisis,” the KDI said.
“The flow of intermediate goods from China has been almost entirely cut off, which appears to be preventing North Korea from keeping its factories running. Even when the national border is closed because of COVID-19, it still ought to be possible to let necessary materials move across the border. This appears to mean that North Korea is having trouble buying those materials because it has run out of the money [US currency] needed to purchase Chinese goods,” said another researcher on the North Korean economy.
This researcher added the following caveat. “Since the official media in North Korea haven’t mentioned or covered this situation, we shouldn’t jump to any conclusions about the severity of the North’s current economic situation.”Potential currency crisis from diminishing supply of US dollars
There are also concerns that North Korea will face a currency crisis when its US dollar reserves run out, which might happen as early as this year. The North’s dollar holdings (with all foreign-denominated currency converted into dollars) are estimated to add up to US$4-5 billion, including US$3 billion held in reserve and US$1-2 billion for market transactions. (North Korea’s GDP in 2019 was about US$30 billion.)
But the North’s US$3 billion in its reserves are gradually running low, and the North could be confronted by a currency crisis by the end of the year, experts say. Amid increasing concerns about insufficient dollar reserves, there are also indications of people hoarding foreign currency, along with predictions that the COVID-19 crisis could accelerate the time when North Korean runs out of foreign exchange reserves.
“North Korea earns US dollars through smuggling, overseas employment of workers, and tourism projects. But now sanctions and the coronavirus border closure have blocked all those sources of income, and the North is running out of money. Feeling the pinch of the dollar shortage, the North Korean authorities have presumably been taking steps to crack down on citizens’ use of dollars in an attempt to absorb dollars from the market,” said another expert on the North Korean economy.
When the US dollar-North Korean won exchange rate (the actual market rate, not the official rate set by the North Korean authorities) soared to 9,000 won per dollar in March and April, the North Korean authorities are presumed to have intervened in the market in order to stabilize the exchange rate.
By Cho Kye-wan, staff reporter
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