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UN sanctions could send North Korean economy plunging as much as 5%

Country's growth, hit hard by worst drought since 2001, may sink deep into negative territory

North Korean leader Kim Jong Un provides field guidance in this undated photo released by North Korea's Korean Central News Agency in September 2016.   © Korean Central News Agency/Reuters

TOKYO -- North Korea is in for a plunge in economic activity, following new economic sanctions by the United Nations, on top of tumbling trade with China and the worst drought since 2001.

Despite its rapid progress in ballistic missile capabilities, much of the North Korean economy remains undeveloped and mired in poverty, with few sources of economic growth other than mining and agriculture.

The new economic sanctions, introduced Saturday by the U.N. Security Council, have eliminated the sources of what growth is left in the economy -- coal, iron ore and other minerals exports.

North Korea's economy is likely to shrink around 5% in 2017, according to Rajiv Biswas, Asia-Pacific chief economist for IHS Markit.

Such a contraction would be by far the worst in recent years. North Korea's economy recorded negative growth in five of the last 11 years, but the scale of contraction was usually around 1%, according to data from the Bank of Korea.

The North Korean economy shrank 4.4% in 1995, when the country was hit by one of the worst famines in its history, which left more than 2 million people dead.

The new sanctions came as the U.N. Food and Agriculture Organization warned July 20 of the worst drought since 2001 and of a severe food shortage over the next few months in North Korea.

According to the FAO, early season crop production is down 30% compared to last year.

A brewing economic crisis follows a rare expansion of 3.9% in 2016, the fastest in 17 years, on the back of surging coal exports to China.

North Korea depends on China for some 90% of its trade, following a sharp reduction in trade with neighboring South Korea.

Since mid-February, however, China has sharply curtailed its coal imports from North Korea, in line with U.N. sanctions introduced in November limiting the country's exports of coal -- its main export item -- to 7.5 million tons a year.

This has resulted in a drop of more than 50% in Chinese imports from North Korea in March-May from the preceding three-month period and sharply increased North Korea's trade deficit with China, according to data from China's General Administration of Customs.

The U.N. Security Council further tightened the sanctions Saturday, introducing a complete ban on North Korean exports of coal and iron ore as well as seafood exports.

According to Bank of Korea data, mining accounted for 13% of the economy, and agriculture and fishing about 22%. The two sectors accounted for much of the 3.9% growth in 2016, with other sectors showing little growth.

"With both mining and agriculture expected to contract in 2017, around 34% of the total economy of North Korea will be experiencing output declines," Biswas said.

"If the drought continues to impact the main crop, then the negative impact on agriculture could widen further," he added.

IHS Markit estimates North Korea's gross domestic product per capital at $1,355 for 2016, one of the lowest in Asia.

North Korea's poverty is striking, given its prowess in missile technology and the fact that it is surrounded by successful economies such as China, South Korea and Taiwan.

North Korea's leadership shows little sign of learning from its neighbors. "They are not interested in anyone," Biswas said.

"Basically all the benefits have flown to a small group of people and to sustaining their military and weapons program."

In a region where 3-6% growth is the norm, North Korea's growth has rarely exceeded 1%. The country is still unable to feed its own people and depends on China for help.

The question will be how long China is willing to allow North Korea to keep running trade deficits, with more money owed to China, without ever paying its bills.

The implementation of sanctions on Saturday has closed other avenues for foreign exchange for North Korea, by banning countries from increasing the number of North Korean guest workers. This will result in North Korea quickly depleting its foreign exchange reserves.

The deficit North Korea is running with China may not be large in the huge scale of China's wealth, but "China doesn't want to be indefinitely paying for all these things" -- and may put more pressure on Pyongyang to end its military provocations, he said.

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