North Korean authorities threatened "merciless punishment" for defiance of new currency rules, activists said Thursday, as the change sparked panic and despair among merchants left with piles of worthless bills.
North Korea informed citizens and foreign embassies Monday that it would redenominate its national currency, the won, diplomats said. Residents in the reclusive communist country were told they have until Sunday to exchange a limited amount of the old bills into new ones, they said.
The news sent Pyongyang residents distrustful of the local currency rushing to the black market to convert hoarded bills into U.S. dollars and Chinese yuan, South Korea's Yonhap News Agency reported, citing unidentified North Korean traders operating in neighboring China.
Shops, bathhouses, barbershops and restaurants have shut their doors, activists said.
"We heard business and market activities were all suspended," said Lee Seung-yong, an official at Good Friends, a Seoul-based civic group. "People have no money to engage in business."
Authorities have threatened "merciless punishment" for anyone violating the rules of the currency exchange, Good Friends said Thursday.
The overhaul of the won _ the most drastic in 50 years _ appears aimed at curbing runaway inflation and clamping down on the street markets that have sprung up in the tightly controlled nation, analysts said.
Unable to feed its 24 million people, the regime began allowing some markets in 2002, including farmers' markets.
The markets may have encouraged trade but they also brought in banned goods such as films and soap operas from wartime rival South Korea, posing a threat to leader Kim Jong Il's totalitarian rule, analysts said. The country's largest wholesale market, in Pyongyang, reportedly was shut down in mid-June.
The government is retaking control of the economy from the hands of merchants, analysts said.
"This is aimed at rooting out the budding private sector and strengthening the government's control of the economy," said Jeong Kwang-min, a research fellow at the Institute for National Security Strategy in Seoul.
He said the move has a broader goal in mind: to pave the way for Kim Jong Il to turn over power to his youngest son, Kim Jong Un, and to ensure he inherits a stable economy.
The country has been mired in economic turmoil since the collapse of the Soviet Union in the early 1990s and flooding and economic mismanagement in the mid-1990s. North Korea since has relied on international food handouts and aid negotiated in exchange for promises to dismantle its nuclear program.
Much of that aid has been suspended, and international sanctions tightened, because of Pyongyang's nuclear defiance. The currency overhaul comes just days before President Barack Obama's envoy on North Korea is set to travel to Pyongyang to try persuading the regime to return to nuclear disarmament talks.
North Korea announced that the exchange rate would be set at 100 old won to 1 new won, one foreign diplomat said. Residents will only be allowed to exchange 150,000 won for the new currency, according to media outlets monitoring North Korean radio.
The rest must be deposited into government-run banks, but it wasn't clear whether residents would have access to the funds, according to South Korean media.
Foreign countries with embassies in Pyongyang said they had been informed of the switch.
The British Embassy in Pyongyang was told Monday that shops, markets and restaurants would be closed temporarily, apart from those that accept foreign currencies, said Kate English, head of press and public affairs at the British Embassy in Seoul.
The Foreign Ministry told diplomats Tuesday that "the old currency could be exchanged in banks, but it won't be accepted as a method of payment," she said.
Pyongyang residents rushed to the black market to convert their cash savings into foreign currencies, Yonhap said.
"People's distrust of the North Korean currency has become serious," Yonhap quoted one North Korean trader as saying. "The value of foreign currencies will go up since people will prefer dollars and (Chinese) yuan."
In Seoul, the British press attache said there were no reports of chaos. "According to our embassy, the city is still very calm," English said.
Yoo Ho-yeol, a North Korea expert at Seoul's Korea University, said he didn't expect any further drastic measures. "Other kinds of private economic enterprise will eventually spring up again."
Associated Press writers Jae-soon Chang and Kwang-tae Kim contributed to this report.