Kim Jong-un comes round to talks as his currency reserves shrink

[SEOUL] Kim Jong-un's enthusiasm for talks on North Korea's nuclear programme coincides with a sharp drop in his nation's foreign currency reserves.

Sanctions that hurt North Korea's economy by limiting exports in 2017 will this year drain its cash hoard enough to crimp imports of essential products, according to analysts in South Korea.

An additional risk for the regime in Pyongyang is a spike in inflation, the Korea Institute for International Economic Policy, based in Sejong south of Seoul, said in a report last month. Another research group in Sejong, the Korea Development Institute, warned of an economic downturn in North Korea.

The isolated nation has a history of dangling the prospect of a negotiated settlement on its nuclear arsenal, and then walking away after getting concessions. This time Mr Kim has agreed to meet South Korean President Moon Jae-in for talks in the border village of Panmunjom and US President Donald Trump has signalled he's open to discussions.

"If estimates on North Korea's foreign-currency reserves are accurate, imports will drop in 2018 and lead to a decline in activity at private markets and in industrial production from the second half," wrote Choi Jang-ho, a researcher at the Korea Institute for International Economic Policy.

"The disruption to imports of raw materials and crude oil will mean changes are inevitable for Kim Jong Un's industrial policies."

North Korea's exports to China - its biggest trading partner - plunged 37 per cent in 2017 while imports edged up by 4 per cent, leaving a goods trade deficit of US$1.7 billion, data compiled by South Korean agencies shows.

Mr Choi estimates that North Korea's foreign currency reserves are only about US$4 billion to US$5 billion, compared with the South's US$395 billion. While measures of Pyongyang's reserves are sketchy, its dollar holdings could dry up by around October if international sanctions continue, Kang Seok-ho, the chairman of South Korea's parliamentary intelligence committee, said last month.

The relative stability of North Korea's won and prices for goods at markets in the nation could change this year, according to Mr Choi. Up until now, a flow of dollars held by the private sector flowed into the markets, he wrote.

Kim Byung-yeon, an economics professor at Seoul National University and author of "Unveiling the North Korean Economy", estimates that foreign currencies held by North Korean authorities could be anywhere from US$3 billion to US$7 billion. He expects the holdings to be somewhere in the middle of the range.

"North Korea's economy probably contracted 2 per cent last year as economic sanctions took effect," Mr Kim said. "The drop in foreign-exchange reserves will continue this year, although not as much as in 2017 as imports may decline along with exports."

Said Lim Kang-taeg, a researcher at another think tank, the Korea Institute for National Unification: "North Korean authorities may have been able to control prices for a short term, but they can't do that for ever and prices of products affected by sanctions will start to move upward."

"Concerns over a military strike by the US and the pressure from economic sanctions are likely to be behind North Korea's change of attitude."

BLOOMBERG