North Korea-BUDGET AND FINANCE

The Ministry of Finance controls all aspects of the government's budget and finance, including banks. The Central Bank issues currency, regulates the money supply, sets official foreign exchange rates, deals with the purchase and sale of gold and foreign exchange, and handles foreign loans. The Foreign Trade Bank, under the supervision of the Central Bank, handles transactions and letters of credit related to foreign trade, and controls the foreign exchange payments of foreign trade organizations and other enterprises. The K mgang Bank is a specialized bank that handles transactions of foreign trade organizations dealing with exports and imports of machinery, metals, mineral products, and chemical products. The Daesng Bank handles transactions of the Daesng Trading Company and other trading organizations. There are also three joint venture banks.

The state budget is a major government instrument in carrying out the country's economic goals. Expenditures represented about three-quarters of GNP in the mid-1980s--the allocation of which reflected the priorities assigned to different economic sectors. Taxes were abolished in 1974 as "remnants of an antiquated society." This action, however, was not expected to have any significant effect on state revenue because the overwhelming proportion of government funds--an average of 98.1 percent during 1961-70--was from turnover (sales) taxes, deductions from profits paid by state enterprises, and various user fees on machinery and equipment, irrigation facilities, television sets, and water.

In order to provide a certain degree of local autonomy as well as to lessen the financial burden of the central government, a "local budget system" was introduced in 1973. Under this system, provincial authorities are responsible for the operating costs of institutions and enterprises not under direct central government control, such as schools, hospitals, shops, and local consumer goods production. In return, they are expected to organize as many profitable ventures as possible and to turn over profits to the central government.

Around November of every year, the state budget for the following calendar year is drafted, subject to revision around March. Typically, total revenue exceeds expenditure by a small margin, with the surplus carried over to the following year. The largest share of state expenditures goes to the "people's economy," which averaged 67.3 percent of total expenditures between 1987 and 1990, followed in magnitude by "socio-cultural," "defense," and "administration."

Defense spending, as a share of total expenditures, has increased significantly since the 1960s: from 3.7 percent in 1959 to 19 percent in 1960, and, after averaging 19.8 percent between 1961 and 1966, to 30.4 percent in 1967. After remaining around 30 percent until 1971, the defense share decreased abruptly to 17 percent in 1972, and continued to decline throughout the 1980s. Officially, in both 1989 and 1990 the defense share remained at 12 percent, and for 1991 it was 12.3 percent with 11.6 percent planned for 1992 (see table 3, Appendix; Role in National Life , ch. 5). The declining trend is consistent with the government's announced intentions to stimulate economic development and increase the social benefits. However, Western experts estimate that actual military expenditures are higher than budget figures indicate.

Data as of June 1993