Analysis of the countries with the most severe global inflation and their currency devaluation phenomena

Introduction

In the global economic system, some countries are experiencing severe currency devaluation crises. The primary reasons for these situations stem from multiple factors such as high inflation, political instability, a single-sector economy, and international sanctions. This article will analyze the underlying economic causes behind the world’s cheapest currencies to help readers understand the intrinsic relationship between national economic risks and monetary policies.

Top 10 Cheapest Currencies in the World

Below is a list of the 10 most undervalued currencies against the US dollar based on current exchange rate data:

Fundamental Causes of Currency Devaluation

###Vicious inflation cycle

High inflation directly erodes the currency’s purchasing power, serving as the most direct driver of devaluation. When a country falls into an inflation spiral, its central bank is often forced to expand the money supply, further increasing depreciation pressure. This phenomenon is especially evident in many developing countries.

###Economic structural imbalance

Many countries facing currency devaluation rely excessively on commodity exports or a single industry. The fragility of this economic structure means that when global commodity prices fall, their foreign exchange earnings rapidly deplete, unable to support the local currency’s value.

###Political and geopolitical risks

International sanctions, political unrest, and regional conflicts directly undermine investor confidence, leading to capital outflows. Reduced foreign investment further depresses demand for the local currency, creating a vicious cycle.

###Foreign exchange reserves depletion

When foreign reserves are insufficient, central banks find it difficult to intervene in the market to stabilize the exchange rate. This makes the currency more vulnerable to speculative sell-offs.

In-depth Analysis: The 10 Most Undervalued Currencies

###Lebanese Pound(LBP)—Deep Crisis

The Lebanese Pound has undergone a dramatic shift from stability to collapse since becoming the official currency in 1939. This Middle Eastern country is experiencing the most severe financial crisis in modern history.

Evolution of the crisis:

Since 2019, Lebanon has faced triple-digit inflation, widespread poverty, and a paralyzed banking system. In 2020, the government defaulted, and the Lebanese Pound depreciated over 90% in the parallel market. Although the official exchange rate is nominally pegged to the dollar, a multiple exchange rate system has effectively formed.

Current situation:

• Huge disparity between official and market exchange rates
• Severe banking system collapse, funds frozen
• Economy entirely dependent on imports, with inflation driving up prices

###Iranian Rial(IRR)—Currency Collapse Under Sanctions

The Iranian Rial first appeared in the late 19th century, adopting a modern form after several reforms in 1932. However, after the 1979 Islamic Revolution, Iran’s economy underwent fundamental changes.

Deep-rooted reasons for devaluation:

Long-term international sanctions cut Iran off from the global financial system. US sanctions on Iran’s oil sector are particularly destructive, destroying Iran’s main foreign exchange source. Meanwhile, poor domestic management has led to persistent high inflation, further weakening the Rial’s international appeal.

Economic difficulties:

• Oil exports restricted, foreign exchange income sharply declines
• Ongoing geopolitical tensions increase uncertainty
• Public loses confidence in the local currency, with dollarization trends evident

###Vietnamese Dong(VND)—Controlled Devaluation as a Strategic Choice

The Vietnamese Dong has a unique history. After the split of Vietnam in 1954, the North and South established separate monetary systems. Post-war, the Dong became the sole legal currency of unified Vietnam.

Evolution:

Initially plagued by high inflation, the Dong stabilized gradually from the 2000s. Unlike other cheap currencies, Vietnam’s devaluation is partly a deliberate policy choice.

Strategic significance:

• Uses a managed floating exchange rate system
• Moderate devaluation enhances export competitiveness
• Vietnam’s trade surplus makes a weak currency beneficial for the economy

###Laotian Kip(LAK)—The Cost of Underdevelopment

The Laotian Kip has been the official currency since 1952, initially pegged to the French Franc. After economic reforms in the 1990s, the Kip began to fluctuate more widely.

Development challenges:

Laos is one of Southeast Asia’s poorest countries. Its economy heavily depends on agriculture and natural resource exports, with industrial and service sectors underdeveloped. Limited foreign direct investment and an undeveloped financial market have collectively suppressed the Kip’s international value.

Current challenges:

• Slow progress toward economic diversification
• Limited access to international financing
• Post-pandemic economic recovery sluggish

###Indonesian Rupiah(IDR)—Vulnerable Emerging Market Currency

The Indonesian Rupiah has long been among the world’s cheapest currencies. As an emerging market currency, it is particularly sensitive to global risk sentiment.

Historical background:

The Rupiah was once pegged to the Dutch East Indies Guilder and experienced multiple crises in the 20th century—from hyperinflation to the 1997-1998 Asian financial crisis. Despite Indonesia’s large population and recent economic growth, the Rupiah remains under pressure.

Reasons for continued depreciation:

• Heavy reliance on commodities, vulnerable to oil and other raw material price swings
• Relatively limited foreign reserves, constrained central bank intervention
• Volatility in cross-border capital flows

###Uzbek Sum(UZS)—Transition from Planned Economy to Market Economy

The Sum was officially introduced in July 1994, just three years after Uzbekistan gained independence. Although mid-term economic improvements occurred, structural issues persist.

Reform challenges:

Uzbekistan’s economy overly depends on cotton and natural gas exports. Strict government control over the exchange rate and cautious foreign investment policies limit capital inflows. High inflation and limited economic diversification cause the Sum to depreciate continuously.

Current status:

• Gradual easing of exchange rate controls
• Slow but ongoing economic liberalization
• Future stability depends on deep structural reforms

###Guinean Franc(GNF)—Embodiment of Resource Curse

The Guinean Franc has been in use since the early 1960s after independence. Despite Guinea’s rich mineral resources, it exemplifies the “resource curse.”

Poverty trap:

Guinea’s infrastructure is fragile, political instability is persistent, and corruption is severe. Although it has the world’s largest bauxite reserves, mining profits are slim, and benefits rarely reach ordinary citizens. Lack of economic diversification and limited foreign investment keep the Franc weak.

Vicious cycle:

• Political and economic instability deter investors
• High poverty rates and low domestic demand
• Poor infrastructure hampers economic development

###Paraguayan Guarani(PYG)—Fragile Economy of South America

The Guarani has a long history dating back to the 19th century. Paraguay has experienced multiple crises—from the War of 1865-1870 to the debt crisis of the 1980s.

Structural weaknesses:

Paraguay’s economy is highly dependent on agricultural exports, especially soybeans. Persistent trade deficits drain foreign reserves, putting downward pressure on the Guarani. Although the agricultural sector (notably soybean cultivation) has grown, it cannot alter the overall fragile economic foundation.

Challenges:

• Small economic scale with limited competitiveness
• Ongoing debt burden
• High export concentration risk

###Malagasy Ariary(MGA)—Unique Counting System

The Ariary replaced the Malagasy Franc in 2005, becoming one of the few non-decimal currencies. 1 Ariary equals 5 Iramy.

Economic vulnerability:

Madagascar’s economy is highly dependent on agriculture, tourism, and natural resource exports. While relatively stable, it faces risks from climate events and political uncertainty. Widespread poverty and insufficient financial tools make it vulnerable to inflation shocks and external shocks.

Ongoing pressures:

• Over-reliance on agriculture, sensitive to weather
• Tourism affected by global economic cycles
• Political risks intermittently emerge

###Burundian Franc(BIF)—One of the Poorest Countries in the World

The Burundian Franc was introduced after independence in 1964, replacing the Belgian Congo Franc. Decades of little institutional change.

Extreme poverty:

Burundi is one of the poorest countries globally, with an economy mainly based on subsistence agriculture. Long-standing trade deficits, limited industrial activity, widespread food insecurity. High inflation, political instability, and heavy reliance on foreign aid make the economy extremely fragile.

Risk factors:

• Among the poorest nations, lagging development indicators
• Persistent political conflict and social instability
• Virtually no foreign exchange reserves

Exchange Rate Determinants Analysis

Currency value is influenced by multiple interconnected factors:

Interest rates: High interest rates tend to attract foreign investment, increasing demand for the currency and pushing up the exchange rate. Conversely, low rates have the opposite effect.

Inflation and Purchasing Power: Countries with low inflation generally see their currencies appreciate, while high inflation erodes currency value. This is a key indicator for long-term currency trends.

Current Account: Persistent trade deficits weaken demand for the currency. Conversely, trade surpluses support the currency.

Economic Cycles: Recessions lead to lower interest rates, capital outflows, and currency depreciation, creating a chain reaction.

Political Stability: Political risk premiums influence currency value; unstable countries tend to see long-term depreciation.

Conclusion

The world’s most undervalued currencies reflect underlying economic imbalances, policy management differences, and geopolitical realities. These currencies’ devaluations are not isolated phenomena but manifestations of deep-rooted economic issues. Countries with the most severe inflation often issue these cheap currencies, and a certain inevitable correlation exists. Understanding the economic drivers behind these currencies is crucial for comprehending global economic disparities.