North Korea’s economy is expected to continue shrinking this year after South Korea cut off most trade in protest at the sinking of a warship, a report said Tuesday.
“The North is very likely to see its economy shrink this year,” said the report from South Korea’s state-run Korea Development Institute (KDI), without estimating a figure.
“Our outlook is based on a forecast that its external trade will likely post a setback.”
The communist state’s economy contracted 0.9 percent in 2009, according to an earlier report from the South’s central bank.
The South in May announced a ban on most trade after a multinational investigation concluded that a North Korean torpedo sank the warship in March with the loss of 46 lives.
The KDI said at the time the ban would cost the impoverished North hundreds of millions of dollars a year, noting that Pyongyang posted a 333 million dollar trade surplus with its neighbour last year.
The South’s central bank says the North’s economy shrank 1.1 percent in 2006 and contracted by 2.3 percent in 2007, but grew 3.1 percent in 2008 until contracting again last year.
A further shrinkage this year could spark an economic crisis, Tuesday’s report said.
“North Korea’s economy could be hurled into a very precarious situation,” it said.
“As experienced by the nation in the mid-1990s, a crisis could more likely be prompted by consecutive contractions for a relatively long period of time, rather than a one-off steep economic downturn.”
The North’s economy fell deep into trouble in the 1990s after the break-up of the Soviet Union and the loss of its crucial aid.
The country suffered famine in the 1990s which killed hundreds of thousands and it still grapples with severe food shortages.
Since 2005 the regime has been reasserting its grip on the economy, with controls or outright bans on private markets.
A currency revaluation last November, designed to flush out entrepreneurs’ savings, backfired disastrously. It fuelled food shortages as market trading dried up and sparked rare outbreaks of unrest.
The North was forced to suspend its campaign against free markets.
The United Nations in June last year tightened sanctions following the North’s missile launches and nuclear test earlier in the year.