Which country is this?
Also why cannot their govt de-notify smaller denomination and print higher denomination currency notes to avoid this situation?
They do. But the higher denomination currency notes become worthless very soon. That is hyperinflation.
Yes ! now the defecto currency used there is the US Dollar.
There is a funny story i read a few months back about the US Dollar going through a laundry service there and this laundry service is not what you are thinking about. it is more like a actual Laundry service where old US dollar notes are cleaned and repaired in order for it to be reused. lol