NORTH KOREA: TURNAROUND IN FOREIGN DEBT MANAGEMENT AND TRADE PATTERNS
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CIA-RDP90T01298R000200160001-5
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Document Creation Date:
December 22, 2016
Document Release Date:
October 13, 2009
Sequence Number:
1
Case Number:
Publication Date:
February 1, 1985
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REPORT
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Directorate of Secret
Intelligence
/--= G 25X1
North Korea: Turnaround in
Foreign Debt Management and
Trade Patterns
Secret
EA 85-10024
February 1985
Copy 312
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Intelligence
North Korea: Turnaround in
Foreign Debt Management and
Trade Patterns
An Intelligence Assessment
This paper was prepared byl I Office
of East Asian Analysis. Comments and queries are
welcome and may be directed to the Chief,
Northeast Asia Division, OEA,
Secret
EA 85-10024
February 1985
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North Korea: Turnaround in
Foreign Debt Management and
Trade Patterns
Key Judgments North Korea is showing signs of changing its debt management strategy.
Information available P'yongyang, which has not reestablished its international credit rating
as of 1 February 1985 since first defaulting on its foreign debt payments 10 years ago, is:
was used in this report.
? Putting a higher priority on exports-sales to the developed countries
more than doubled in first half 1984 compared with first half 1983.
? Slashing imports, thereby registering a trade surplus in first half 1984.
? Working out agreements with creditors to reschedule a portion of its debt
until later in the decade and into the 1990s.
? Making payments to several of its creditors, including Austria, Sweden,
and Finland, to cover overdue principal and interest.
During 1981-83, North Korea gave little priority to its foreign debt;
P'yongyang allocated resources to domestic demand, rather than to
exports, and repeatedly missed debt payments. We do not know why North
Korea changed course last year but believe several developments are
influencing the regime. The disappointing results of the just-concluded
seven-year economic development plan (1978-84), in which the economy
fell far below almost every target, is perhaps the most important. P'yon-
gyang may be considering a move away from the autarkic policies of the
early 1980s as it develops its next economic plan. China's current opening
to the West, Beijing's pressure on North Korea to adopt similar policies,
and South Korea's surprisingly strong economic growth since 1983 are
other factors that may be influencing P'yongyang.
We are unsure, however, whether North Korea's recent debt payments and
export push reflect a new strategy to resolve the debt situation or merely a
short-term effort at image building. P'yongyang may have hoped that a
few payments would be enough to restore its access to Western credit.
If North Korean actions in 1984 were short term and the debt issue is not
resolved, then we would expect the economy to plod along with only slow
growth well into the 1990s. If, on the other hand, P'yongyang has made a
long-term policy shift, perseveres with the necessary austerity, and restores
its credit rating, then we would expect several years with little, if any,
economic growth and the chance of fairly high rates of expansion by the
end of the decade. Even if P'yongyang is embarking on such a policy
course, however, the leadership may be unwilling to enforce the needed
sacrifices over a period of several years, and backsliding is a possibility. We
see no indications that P'yongyang is prepared to reduce defense spending
to improve the economy's prospects.
Secret
EA 85-10024
February 1985
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North Korea: Turnaround in
Foreign Debt Management and
Trade Patterns
Origin of the Debt Problem
North Korea, desiring to speed up industrial develop-
ment and foster economic modernization, purchased
about $1.3 billion in plant and equipment from West
European nations and Japan during 1973-75. This
compares with imports from those countries totaling
about $200 million during the three previous years.
Inept management in bringing these plants on stream
and a dramatic reversal in North Korean terms of
trade-a plunge in nonferrous metal prices and sharp-
ly increased oil prices-resulted in accumulated obli-
gations more than six times hard currency export
earnings. In consequence, in 1974 North Korea be-
came the first Communist country to default on its
foreign debts.
Figure 1
North Korea: Foreign Debt,
Mid-1984-
Hard currency
Communist
the same burden as the hard currency debt.
We estimate that North Korea's hard currency debt
now totals $1.3 billion.' In addition, about $1.1 billion
in soft currency is owed to the Soviet Union, China,
and East European countries. This soft debt to the
Communist countries is covered by credits extended
on very liberal terms, and repayment does not present
markets to finance its debt
The ratio of North Korea's debt to GNP is less than
20 percent; by comparison, South Korea's ratio is over
50 percent. North and South Korea have similar debt-
to-export ratios-that is, about 2 to 1. The North
Korean economy, however, is more narrowly based
and far less dynamic than South Korea's. More
important, the poor credit rating for the past decade
has left North Korea cut off from new credits,
whereas South Korea easily taps international capital
The Japanese Government is the largest holder of
North Korean hard currency debt with about $240
million outstanding. Most of the credit extended to
' Calculated at mid-1984 exchange rates. The strong appreciation
of the US dollar has substantially reduced North Korea's hard
currency debt in dollar terms since most of the debt is denominated
in European currencies. Dollar appreciation, for example, reduced
Other West
European
groups-26
West European
consortiums-18
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Debt Management Strategy 2
During the early 1980s, P'yongyang paid little atten-
tion to meeting its debt obligations-except those due
Japan, its major non-Communist trade partner. North
Korea made about $160 million in payments to Japan
between 1980 and 1982, keeping fairly close to the
terms of a 1979 agreement. During 1983, however,
North Korea made few payments to any creditors,
including Japan.
In late 1983, P'yongyang changed its policy. In the
first half of 1984, North Korea made payments to
several of its West European creditors, including
Sweden, Austria, Finland, and the two bank consor-
tiums,*to cover overdue principal and interest. We
estimate that these payments amounted to about $130
million. P'yongyang also worked out rescheduling
agreements with France, Sweden, and the two consor-
tiums to spread out principal repayments. The re-
scheduling with the bank consortiums is especially
important because it delays principal payments on
this $400 million debt until 1988-95. As a result,
North Korea will have a less burdensome servicing
schedule over the next three years.
Putting priority on repaying West European rather
than Japanese creditors may reflect a North Korean
desire to diversify import sources and punish Japan
for its imposition of sanctions following the Rangoon
bombing of October 1983. P'yongyang has relied on
Japan for about 70 percent of its imported capital
equipment from the West in recent years. France and
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Figure 2
North Korea: Trade, 1970-83
25X1
During 1981-83, North Korean exports declined as
P'yongyang put greater priority on meeting domestic
demand. Foreign sales in 1983-at $1.4 billion-were
about 20 percent below the 1980 peak level, despite an
' North Korea does not publish trade statistics. Our estimates are
based primarily on partner country data. A variety of sources are
cant extent since the mid-1970s.
West Germany have sold some equipment to North
Korea but Austria, Sweden, and Finland have not
returned to the North Korean market to any signifi-
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Table 1
North Korea: Trade, by Partner a
Exports
Imports
Exports
Imports
Exports
Imports
Exports
Imports
1,785
1,691
1,403
1,500
1,689
1,608
1,396
1,499
889
717
711
681
757
754
602
737
434
508
202
447
294
464
263
465
Japan
174
376
134
290
145
313
122
329
West Germany
167
33
49
30
134
34
127
23
France
17
5
4
69
3
45
3
46
1
8
1
6
0
5
0
18
1
5
0
17
0
6
0
5
2
0
0
0
0
455
209
509
234
463
290
339
272
Communist
896
974
692
819
932
854
794
762
USSR
438
443
348
388
500
440
410
345
China
303
374
232
300
304
281
254
273
a Exports and imports are f.o.b.
increase in arms exports.4 Sales of nonferrous met-
als-traditionally North Korea's major export item-
were particularly weak. P'yongyang also gave in-
creased priority to Communist countries, particularly
the Soviet Union, in allocating exports. This left fewer
goods available for sales to hard currency markets.
North Korean imports did not decline as fast as
exports during this period, partly because of increased
oil imports. In 1983, oil accounted for about 30
percent of total imports, compared with 17 percent in
1980. North Korea's hard currency trade balance
consequently shifted into deficit by 1983 after P'yong-
yang had registered surpluses averaging almost $100
million annually between 1977 and 1980.
In 1984, P'yongyang began putting increased priority
on export markets. Foreign sales rose dramatically.
Exports to the developed countries more than doubled
in the first half of 1984, compared with the first half
of 1983, rising from $135 million to $283 million. The
surge in sales to the developed countries largely
reflected increased gold sales to West Germany; sales
to Japan-primarily nonferrous metals and steel-
rose about 18 percent. Little information is available
on trade with the LDCs in 1984, but exports to the
Communist countries also increased in the first half of
the year. Sales to the Soviet Union and China rose 8
percent and 25 percent, respectively.
P'yongyang also reduced its imports substantially in
first half 1984. Purchases from the developed coun-
tries were down by about one-third; imports from
China fell almost 20 percent. As a result, North
Korea sharply improved its trade balance. P'yongyang
recorded a $120 million trade surplus with the devel-
oped countries in first half 1984, compared with a
$120 million deficit in first half 1983, representing
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Table 2 Million US $
North Korea: 1984 Trade Trends
We believe, however, that this autarkic strategy has
produced unsatisfactory results from P'yongyang's
perspective. North Korea has just concluded its seven-
year economic development plan (1978-84), and per-
formance fell far below almost every target. We
estimate real GNP growth during the period averaged
3 to 4 percent annually, slightly better than the LDC
average but far short of the regime's 10-percent-per-
year goal. Growth has been particularly weak in
recent years and shortages continue to plague the
First Half
First Half
1983
1984
68
80
65
200
USSR
200
217
China
100
125
Imports
12
16
France
27
2
USSR
201
207
China
137
113
Trade Balance
Japan
-112
-43
West Germany
53
184
France
-25
0
the first surplus in its trade with the developed
countries in more than a decade. North Korea's trade
balance with its two major Communist trade partners
also shifted into surplus in first half 1984.
P'yongyang's Motives
In the early 1980s, P'yongyang adopted an inward-
looking development strategy focused on agriculture,
electric power, and transportation projects-sectors
that depend heavily on domestically produced equip-
ment. This policy of self-reliance followed an unsuc-
cessful attempt by P'yongyang in the late 1970s to
keep up with its debt obligations and restore its credit
rating.
economy.
The economy's poor showing may be prompting
P'yongyang to shift policy back in favor of maximiz-
ing foreign exchange earnings and resolving the debt
problem. P'yongyang may be trying to increase its
access to Western equipment and technology for its
next plan period to spur more-rapid long-term growth.
China's opening to the West and economic reform
policies also may be influencing North Korean policy
decisions. We believe that China has been encourag-
ing P'yongyang to adopt economic reforms similar to
its own. In September, shortly after Premier Kang
Song-San visited Beijing, P'yongyang promulgated a
joint venture law patterned after China's foreign
investment regulations. North Korea has also been
giving increased attention to light industry, another
policy that follows China's example.
The surprisingly strong resurgence of the South Kore-
an economy since 1983 probably also prompted P'yon-
gyang to reconsider its policies. South Korean real
GNP grew 8.5 percent per year in 1983-84. Under
such circumstances, North Korea may have decided
that it must acquire Western equipment and technol-
ogy to compete with the South economically. F
P'yongyang's debt management policies could also
reflect a broader change in North Korea's political/
economic strategy, exemplified by such developments
as the North-South economic talks. But at this point,
we are unable to determine if P'yongyang has altered
its overall priorities and embarked on fundamental
policy shifts
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At the same time, we cannot rule out the possibility
that P'yongyang's debt payments last year were noth-
ing more than a short-term effort by the regime to
improve its international image. P'yongyang may
have hoped that a few payments would be enough to
restore its access to Western credit. The regime may
have no intention of keeping up with payments in
1985.
If P'yongyang's actions last year were short term and
the debt issue is not resolved, then we would expect
the North Korean economy to grow slowly during the
next plan period. Under such conditions, only a
reduction in defense spending or substantial foreign
assistance-neither of which appears likely-would
enable P'yongyang to do better than its poor showing
of the past plan period.
If, on the other hand, P'yongyang is embarking on a
policy to resolve the debt issue, perseveres with the
necessary austerity, and restores its credit rating, then
the economic outlook would be brighter over the
longer term. Resolving the debt situation would re-
move an important constraint on the long-term
growth of the economy. A resulting inflow of Western
technology would put North Korea in a better position
to achieve strong rates of expansion in the 1990s.
North Korea has abundant natural resources and can
maintain high investment ratios. The new joint ven-
ture policy, if implemented and attractive to foreign
investors, could also begin to pay dividends by the
early 1990s
Getting the debt situation under control, however,
would carry a stiff short-term cost, and we are not
certain P'yongyang will be willing to enforce the
necessary sacrifice over a period of several years.
Maintaining a hard currency trade surplus to gener-
ate funds for debt obligations would require a signifi-
cant diversion of economic resources to the export
sector, as well as a curtailment of imports. Both of
these steps would seriously slow domestic economic
activity in the short run and further delay investment
and military projects. Under such conditions, the
North Korean leadership is likely to feel pressure to
divert economic resources away from exports.
Japan
Interest payments due in June and December.
European Bank Consortiums
Interest payments due in February, May, August, and
November.
France
Interest payments due in May and November.
Sweden
Principal and interest payments due; timing
unknown.
Finland
Missed payment from October 1984 due, and 1985
payment due; timing unknown.
West Germany
Principal and interest due; timing unknown
P'yongyang's task is complicated because economic
resources are already stretched thin. The heavy de-
fense burden-an estimated 25 percent of GNP-is a
particularly large drain on resources. We detect no
indication that P'yongyang is willing to reduce de-
fense spending or lower the priority of the military
sector. In addition, P'yongyang has indicated that it
wants to provide additional investment for consumer
goods industries. Living standards have only increased
marginally over the past decade. North Korea also
faces pressure from its Communist country trade
partners, particularly the Soviet Union, to meet ex-
port commitments, with Moscow using its oil leverage
to press P'yongyang to fulfill trade obligations.F_
The recent debt reschedulings-by stretching princi-
pal payments over a longer period-provide some
relief. We estimate that North Korean interest and
principal payments due its Western creditors will
amount to about $225-250 million annually over the
next three years. North Korea's hard currency debt
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Ct:%Ica
ing.
service ratio-at 35 percent-has declined over the
past decade because of the growth in North Korean
exports, global inflation, and the lack of new borrow-
P'yongyang's debt service burden will nonetheless be
extremely tough to manage unless new credits can be
obtained
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