By Kang Seung-woo
Staff reporter
The North Korean economy is forecast to contract this year due largely to South Korea's decision to suspend inter-Korean trade in countermeasures for its surprise attack on a navy vessel, a state-run research organization said on Tuesday.
The Korea Development Institute (KDI) said that North Korea's economy would continue to plummet in 2010, following a 0.9 percent contraction in 2009, but it did not disclose a specific estimate for this year. However, the think tank predicted the possible repetition of the level of crisis seen in the 1990s, if this downward trend continues.
"The North is very likely to see its economy shrink this year," the KDI said. "Our outlook is based on a forecast that its external trade will likely suffer a setback."
The contraction is chiefly caused by the escalating tension on the Korean Peninsula.
In May, the South announced that it would stop most trade with the North after claiming a North Korean torpedo sank its Navy frigate the Cheonan on March 26, killing 46 sailors.
The KDI said the ban would cost North Korea hundreds of millions of dollars a year. In 2009, the North posted a $333 million inter-Korean trade surplus.
Trade with the South represents more than 30 percent of the North's trade. China is Pyongyang's biggest trading partner.
The North Korean economy shrank 1.1 percent in 2006 and 2.3 percent in 2007.
Although it recovered briefly in 2008 after posting a 3.7 percent increase, it shrank again last year.
The KDI said that a further contraction may lead to severe economic problems in the North.
"North Korea's economy could be hurled into a very precarious situation," it said. "As experienced in the mid-1990s, a crisis could erupt, if this downward spiral continues."