Bank of Korea: "North Korea Holds $3-6.6 Billion in Foreign Currency... Sharp Decline Could Trigger Rapid Inflation" (Comprehensive)

Foreign Currency for Transactions $1B-$2.4B · Foreign Currency for Value Storage $2B-$4.3B
"Prolonged North Korea Sanctions Could Cause Economic Shock to North Korea"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Amid the expansion of sanctions against North Korea, the amount of foreign currency held by North Korea is decreasing. However, according to a study by the Bank of Korea, only foreign currency used as a store of value is currently decreasing, so prices and exchange rates remain stable. However, if sanctions against North Korea are prolonged, the amount of foreign currency used for transactions is expected to decrease significantly, causing prices and exchange rates to surge and resulting in a major economic shock.

According to the Bank of Korea's 'BOK Economic Research' published on the 28th, titled 'The Impact of Decreasing Foreign Currency Holdings on Prices and Exchange Rates in the North Korean Economy with Widespread Dollarization,' as of 2014, North Korea's foreign currency holdings for transactions are estimated to be between 1 billion and 2.35 billion USD, and foreign currency holdings as a store of value are estimated between 2.01 billion and 4.28 billion USD, making the total foreign currency holdings approximately 3.01 billion to 6.63 billion USD.

Since 2017, as sanctions against North Korea have intensified, North Korea's foreign currency funding situation has also deteriorated. Nevertheless, North Korea's prices and exchange rates have remained stable. The reduction in foreign currency holdings due to economic sanctions against North Korea is categorized into three stages: Stage 1, a decrease in foreign currency used as a store of value; Stage 2, a partial decrease in foreign currency used for transactions; and Stage 3, a significant decrease in foreign currency used for transactions. The report stated, "Currently, it is mainly the initial stage where foreign currency used as a store of value is decreasing, so prices and exchange rates have not been affected," and added, "North Korea is understood to hold a considerable amount of foreign currency used as a store of value."

The initial stage is analyzed as a level where the decrease in foreign currency inflow can be managed by utilizing foreign currency held as a store of value. The current level of foreign currency reduction in North Korea is not insufficient to support real transactions, which is the basis for the observed stability in North Korea's prices and exchange rates.

However, from Stage 2, when foreign currency used for transactions begins to decrease, changes in North Korea's exchange rates and prices are expected. Immediately after the depletion of foreign currency held as a store of value, exchange rates are expected to rise slightly and prices to fall. However, if sanctions continue and Stage 3 is reached, where foreign currency used for transactions also decreases, there is a possibility of a sharp rise in exchange rates and prices, causing a significant economic shock to North Korea.

Moon Seongmin, Senior Research Fellow at the North Korean Economy Research Office, said, "If North Korea's prices and exchange rates surge, phenomena similar to the foreign exchange crisis we experienced could occur," but added, "Since North Korea's economy is a controlled and planned economy, it remains to be seen whether the entire North Korean economy will enter a crisis situation." Dollarization refers to the use of the US dollar as an official currency by countries other than the United States.

This content was produced with the assistance of AI translation services.