Weak nations with strong currencies

Two unlikely currencies were among the world's strongest currencies in 2022: the Yemeni rial and the Afghan afghani. Yemen is currently in the middle of a civil war and Afghanistan is a failed state, so neither is your typical candidate for a buoyant currency.

Both countries share a peculiarity, however: unlike most nations, neither can increase the supply of their paper currency. That may explain their odd bout of strength against the dollar.

Let's start with Afghanistan.

It's worth reading this blog post I wrote back in 2021, but if you don't have time the gist is that Afghanistan's central bank – Da Afghanistan Bank (DAB) – is effectively cut off from the global banknote printing market thanks to sanctions. Cash is the dominant form of money in Afghanistan. With the supply of afghani notes fixed and the demand for them rising over time along with population growth, my guess at the time was that the afghani's purchasing power could be fairly stable. "In a chaotic economy, the afghani—or at least some version of the afghani—may be one of the country's more reliable elements."

And that seems to be what is happening. According to Bloomberg, the afghani gained 5.6% against the U.S. dollar in 2022, one of the strongest performances of any currency in the world.

The stock of afghani notes is not entirely fixed. Late in 2022 the DAB was permitted to accept one batch of new banknotes, according to Reuters.

However, the new notes didn't add to the stock of notes circulating in Afghanistan. Rather, they were used to replace existing notes, which are often "torn in shreds or held together with cellotape." The LA Times had a good article on the shabby state of the Afghan money supply, including pictures like this one:

"Afghanistan’s money is crumbling to pieces, just like its economy" [source] copyright LA Times

As for Yemen, diligent readers may recall from my two previous blog posts (here and here) that a civil war has split the Yemeni rial into two different currencies. The Houthi rebels in the North control one branch of the central bank, the Sana branch, and have adopted rial banknotes printed before 2016 as the region's official currency. The Saudi-backed government in the South runs the other branch and has claimed all notes printed after 2016.

The two rials are not longer fungible, their price having diverged over time as the chart below from ReliefWeb illustrates. The rebel's old rials, the ones printed before 2016 (in blue) have held their value against the U.S. dollar, and even risen a bit in 2022. But the value of the Saudi backed regime's rials (in orange) has plunged:

The U.S. dollar exchange rate of the rebel-controlled Yemeni rial and the official rial [Source: ReliefWeb]

The reason? The rebel North is isolated from the rest of the world and can't contract with printers for new notes. Not only that, but the stock of pre-2016 notes is by definition locked in time. A note printed in 2023 can't masquerade as a pre-2016 note, at least not easily so. The official regime even printed up a batch of fakes last year and tried to sneak them over the border in order to undermine the rebel economy, a story I recounted here. But the rebels spotted the difference and refused to accept them.

So like Afghanistan, if you start with a weak economy and a fixed note supply, then add population growth, you end up a strong currency.

Unlike the rebels, the official regime in south Yemen has access to the global banknote printing market, and has ordered new notes and spent them into circulation. Which explains why the official regime's Yemeni rial has steadily declined in value.