North Korea's economy in crisis because of COVID-19, sanctions - South

By Joori Roh and Hyonhee Shin

SEOUL (Reuters) - North Korea's economy suffered its biggest contraction in 23 years in 2020 as it was battered by continued U.N. sanctions, COVID-19 lockdown measures and bad weather, South Korea's central bank said on Friday.

The Bank of Korea (BOK) gives the most reliable estimates of economic output in the reclusive North, but other experts said the situation could be even worse.

Kim Byeong-yeon, an economics professor at Seoul National University who specialises in North Korea, estimated that the economy there could have shrunk up to 20% from 2017-20, taking into account the role of informal markets which he said the BOK tends to overestimate during downturns.

"It is indeed a major crisis, and one that might bring bigger political repercussions as people now have far more economic interests and knowledge than the 1990s, having done trade, smuggling and other activities themselves," Kim said.

A South Korean government source with close knowledge of the matter told Reuters that the North faces its worst economic crisis since a 1990s famine killed as many as 3 million, although few deaths have been reported this time thanks to Chinese aid and the release of military and emergency reserves.

"Two years of border shutdown and typhoons have deepened the North's crisis, but not to the extent that it shook the foundation of its economy," the source said, citing Chinese help.

The BOK said gross domestic product (GDP) in the North contracted 4.5% last year in real terms, the worst since 1997 and reversing a 0.4% growth in 2019, the first expansion in three years.

"Along with the continued intense U.N. sanctions, North Korea's lockdown measures to fight the coronavirus pandemic ... and worsened weather conditions such as heavy rains and typhoons were the main drivers to the contraction," a BOK official told reporters.

The BOK has released annual estimates on the North's economic output since 1991, based on information from the South's intelligence and government and foreign trading agencies.

NO CONFIRMED CASES

North Korea has not confirmed any COVID-19 cases, but closed borders and imposed strict prevention measures, seeing the pandemic as a matter of national survival.

The measures also included a 30-day quarantine for those who showed COVID-19 symptoms, a ban on domestic travel and entry to the capital Pyongyang, the BOK official said, adding that these moves greatly impacted the manufacturing and services sectors.

North Korea's state-controlled economy had already been dogged by international sanctions, aimed at pressing leader Kim Jong Un to abandon nuclear and weapons programmes.

Kim said last month that the failure to implement anti-virus measures had caused a "great crisis". In June, he said the country faced a "tense" food situation, citing the pandemic and last year's typhoons.

The pandemic has compounded the squeeze, in part because North Korea halted trade with China, its biggest economic lifeline, with Chinese customs data showing bilateral trade plummeted more than 80% last year from 2019.

The two countries were working to resume trade as early as August after scrapping earlier plans amid concerns over more contagious COVID-19 variants, the South Korean government source said.

The BOK said North Korea's trade volume plunged 73.4% to $0.86 billion last year, with exports of the non-sanctioned items including watches and wigs plunging 86.3% and 92.7%, respectively.

"Trade volume which took up about 21.9% of the GDP in 2016 ... was sharply reduced to 2.9% in 2020 after the COVID-19 lockdown impact added to the economic sanctions," the BOK official said.

This week, North and South Korea restored hotlines that Pyongyang severed a year ago, amid efforts to rebuild ties by Kim and South Korean President Moon Jae-in, who has been seeking to restart economic cooperation.

Friday's BOK data showed that industrial output, which accounts for 28% of the North Korean economy, decreased 5.9%, while output from agriculture, forestry and fisheries fell 7.6%.

The services sector, which accounts for a third of the economy, also shrank 4.0%.

Graphic: North Korea, South Korea's annual growth rate - https://graphics.reuters.com/NORTHKOREA-ECONOMY/GDP/zdvxoyagxpx/chart.png

(Reporting by Joori Roh and Hyonhee Shin; Editing by Raju Gopalakrishnan)

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