S.Korea Risks Losing W3.5 Trillion in Loans to N.Korea

      January 19, 2012 13:40

      North Korea owes South Korea more than W1 trillion in loans provided in the form of food aid and other support, according to government data on Wednesday (US$1=W1,142). If the W2.3 trillion South Korea provided indirectly to North Korea through the Korean Peninsula Energy Development Organization (KEDO) between 1998 and 2006 for the abortive construction of a light-water reactor is included, the total amount of loans swells to around W3.5 trillion.

      According to the Unification Ministry, the Kim Dae-jung and Roh Moo-hyun administrations gave North Korea 2.4 million tons of rice and 200,000 tons of corn in the form of loans between 2000 to 2007 that the North has to repay over 20 years at an annual interest of 1 percent.

      The food aid amounted to US$720 million and carried a 10-year grace period. Interest payment alone totaled $155.2 million. The first tranche of the loans maturing on June 7 of this year amounts to $5.83 million. North Korea has to repay $5.78 million in 2013, $19.73 million in 2014, and $19.56 million in 2015. The redemption deadline continues until 2037.

      Trucks loaded with rice cross the inter-Korean checkpoint to Kaesong on July 26, 2006 (file photo).

      Between 2007 and 2008, the government also lent the North $80 million to buy materials to manufacture textiles, shoes and soap. North Korea repaid 3 percent of that or $2.4 million in the form of 1,005 tons of zinc ingots, leaving $77.6 million to be repaid. The North is required to repay $8.6 million a year for a decade beginning in 2014 since the loan carries a five-year grace period.

      Combining all the loans, North Korea has to repay South Korea $123 million over the next five years. If the loans were repaid, North Korea's state-run Chosun Trading Company would transfer the money to the Export-Import Bank of Korea. The money is then stored in the Inter-Korean Cooperation Fund. The Unification Ministry has included the $5.83 million in maturing loans in its expected revenues.

      But given North Korea's dire economy and icy inter-Korean relations, there is little chance that the North will repay the debt. The Kim Dae-jung and Roh Moo-hyun governments did not prepare any contingency plans in case the loans turn sour, raising the possibility of a default.

      A government source said, "North Korea is blaming South Korea for the chilled relations and will probably claim that the loans will be repaid only after the South eases its economic sanctions against the North. In that case, the loans will have to be written off as uncollected."

      The loan contract merely stipulates a punitive 2-percent interest for late repayments and mentions no other measures to retrieve the money. Although it also stipulates that the two Koreas can "negotiate" repayments, it is unlikely that the North will even discuss the issue.

      In addition to the loans for food and raw materials purchases, South Korea used W585.2 billion from the Inter-Korean Cooperation Fund between 2002 and 2008 to connect North Korea's railroads and highways with South Korea. The South loaned the North W149.4 billion to buy construction materials and equipment for the project. Pyongyang has to repay that loan over 20 years, also at an annual interest of 1 percent with a 10-year grace period, once construction is completed.

      But given that condition, it is even harder to collect, since the project has been halted since the Lee Myung-bak administration was inaugurated in 2008. A Unification Ministry official said further negotiations with North Korea are necessary to retrieve that money.

      There is also little chance of retrieving the 1.37 trillion loan the government provided through KEDO and some W900 billion in interest on the loan. According to the contract, North Korea is required to repay the loan in 20-year installments to KEDO once the reactor is built, and KEDO returns the money to South Korea. But construction was halted completely in 2006, when the reactor was only 37 percent built, and KEDO is defunct. A government official said what remains of KEDO continues to send bills to North Korea, "but there has been no answer."

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