The North Korean won has seen a decrease in value against the dollar and yuan over the year, leading to a shift in marketplace behavior where more transactions are now conducted in foreign currencies. Sources within North Korea have indicated that the rise in exchange rates has spurred an increased public demand for foreign currency, with market vendors showing a preference for transactions in either the dollar or yuan due to the diminishing value of the local currency.
According to a source in Ryanggang province, "The exchange rates sometimes jump several hundred won all at once. Vendors require a premium for won-denominated transactions. When one yuan is selling for 1,800 won, for example, they might charge 1,900 won per yuan, relative to the price. That's the only way vendors can avoid a loss when exchange rates are rising so fast." This strategy is employed by North Korean merchants to mitigate potential losses due to the rapidly depreciating won.
A source in North Pyongan province observed that the preference for foreign currency has expanded to include not just imported goods but also domestic agricultural products, a significant change from prior practices. "Back when the border was locked tight during the pandemic, not only rice and corn but most products were bought for Korean won, but now everything can be bought with Chinese yuan. Everybody is using foreign currency because vendors would rather get dollars or yuan," the source noted.
The re-dollarization trend is a reversal from the de-dollarization seen during trade restrictions imposed by the pandemic, which led to a decline in foreign currency demand and exchange rates. However, the current rise in exchange rates is driving a renewed preference for the dollar and yuan, especially in regions close to the Chinese border where smuggling previously facilitated the flow of Chinese-made goods into North Korean markets.
The depreciation of the North Korean won and the corresponding rise in foreign currencies are prompting merchants, even in rural areas not typically influenced by smuggling, to prefer transactions in foreign currency for domestic agricultural products. This shift is underscored by incidents where vendors refuse Korean won or demand payments in yuan, challenging the authorities' efforts to enforce regulations against foreign currency transactions.
With the increasing reliance on foreign currency, North Koreans are turning to money changers for currency conversion to facilitate their purchases, signaling a weakening of state control over the economy. "Growing usage of the dollar makes it harder for the North Korean authorities to exercise fiscal policy or control the domestic currency. Given the depreciation of the North Korean won, attempts to guide or force North Koreans to use the Korean won are unlikely to be effective," explained Son Gwang-su, an analyst with the KB Financial Group Research Institute.
Source: Daily NK