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doi: 10.1111/j.1467-8411.2012.01335.x

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On the conduct of monetary policy in Vietnam

Tra Pham and James Riedel*
Vietnam has the highest ination rate in Southeast Asia (over 20 per cent year-on-year). This paper examines the extent to which ination in Vietnam is due to its conduct of monetary policy. It is argued that, had the central bank implemented policy on a more timely basis, ination would not have been as high as it was, but the more fundamental problem is that the central bank does not have the tools it needs to conduct monetary policy effectively. Monetary policy is further complicated by Vietnams exchange rate policy. By choosing to peg the currency and maintain fairly free capital mobility, the country has all but given up the ability to pursue an independent monetary policy. As a consequence, the central bank is forced to attempt to sterilise its foreign exchange interventions, which it is ill-equipped to do. The paper argues that nancial sector liberalisation is needed not only to promote growth but also to maintain macroeconomic stability.
Macroeconomic stabilisation is at the top of the policy agenda in Vietnam.1 The ination rate rose to 22 per cent in May 2011 (year-on-year). The value of the dong in May 2011 was down 19 per cent from a year ago, as indeed it would have to be for Vietnam to maintain its international price competitiveness. Bank lending rates in May 2011 were reportedly above 20 per cent, again as they would have to be for lenders to be willing to make a loan if the expected ination rate were anywhere near the current rate. The problem is ination. Since it is widely understood that ination is always and everywhere a monetary phenomenon, questions have been raised about the State Bank of Vietnams (SBV) conduct of monetary policy. Does the SBV deserve criticism? The answer offered here is an unequivocal yes and no.

apel_1335

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Yes, had the SBV implemented policy on a more timely basis, the ination rate would probably not be as high as it is. But, no, the fundamental problems plaguing the conduct of monetary policy in Vietnam are not of the SBVs making. The SBV does not have the tools it needs to conduct monetary policy effectively, in large part because the government has not given priority to nancial sector liberalisation, and in particular to the development of a liquid secondary bond market. In addition, the SBV faces another challenge in conducting monetary policy that is not always given due consideration, which is Vietnams exchange rate policy. By choosing to peg the dong to the dollaralbeit with adjustments that have increased in magnitude and frequency in the recent yearsand maintain

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Tra Pham, , International University and Vietnam National University, and James Riedel, , Johns Hopkins University School of Advanced International Studies, Washington DC. The paper was written under the auspices of the USAID/ STAR-Vietnam project. The paper reects the views and opinions of the authors and not necessarily those of USAID/ STAR or any government agency. The authors are grateful to Ben Bingham, Vuong Quan Hoang, Phan Quang, Jonathan Pincus, and Scott Robertson for comments and suggestions, but alone are responsible for any errors or omissions. Resolution 11, February 24, 2011, made it ofcial.

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ASIAN-PACIFIC ECONOMIC LITERATURE

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Table 1 A stylised version of the nancial system

Central bank Assets Foreign reserves (R) Domestic securities (D) Net claims on commercial banks (NC) Liabilities Currency in circulation (CC) Bank reserves (BR) Commercial banks Assets Loans Liabilities Deposits (DEP) Net claims on commercial banks (NC) Households/businesses Assets Currency in circulation (CC) Deposits (DEP) Other assets Liabilities Loans

Bank reserves (BR)

Other liabilities

fairly free capital mobilityde facto, if not de jureVietnam has all but given up the ability to pursue an independent monetary policy. The only opening for an independent monetary policy that is available to the SBV is through the sterilisation of foreign exchange market interventions. Indeed, attempts to sterilise massive intervention in the foreign exchange market have been the main driver of monetary policy in recent years. The scope of this paper is conned to the SBVs conduct of monetary policy, by which we mean how and to what effect it has used the instruments of monetary policy at its disposal. We do not address the issue of how credit was allocated, which, given its rapid growth under conditions of high and volatile interest rates, has justiably raised concerns about a deterioration in the quality of bank loans and a growing vulnerability of the banking system to a crisis.

households and businesses. Currency in circulation is a liability of the central bank, and bank deposits are liabilities of the commercial banks. Commercial banks, in turn, deposit with the central bank a fraction of the deposits they take from households and businesses as bank reserves (BR). The liabilities of the central bank constitute base (or reserve) money (B = CC + BR). Since the liabilities of the central bank are matched by its assets, base money can also be dened as the sum of central bank assets (B = R + D + NC) (Table 1). The central bank conducts monetary policy by adjusting the size of its balance sheet (B) and by adjusting the money multiplier (mm), dened as the ratio of the money supply to base money:

49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79

mm =

M CC + DEP 1+ c = = . B CC + RR + ER c + r + e

Analytical framework
A stylised version of the balance sheets of the nancial and non-nancial sectors of the economy (presented below) serves as a framework for analysing the conduct of monetary policy in Vietnam. The money supply (M), broadly dened, consists of currency in circulation (CC) and bank deposits (DEP) held by
2

As shown in the above equation, the size of the money multiplier depends on the ratios of currency to deposits (c), required reserves to deposits (r), and excess reserves to deposits (e). In the reserve requirement ratio (r), the central bank has an instrument for managing the money supply by changing the money multiplier. In addition, the central bank manages the size of its balance sheet (that is, base money) through open-market operationsbuying and selling domestic-currency securities, mainly

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PHAM AND RIEDEL ON THE CONDUCT OF MONETARY POLICY

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government bondsand by borrowing from and lending to commercial banks through its lending facilities (for example, the discount and repo windows). When the central bank buys (sells) government debt or lends to (borrows from) banks, its assets (D or NC) and liabilities (BR) go up (down), and with it the money supply. In countries with developed nancial markets, central banks typically rely mainly on open market operationsthat is, buying and selling government bonds in the secondary bond market. Little use is made of the reserve requirement ratio or lending to commercial banks. The reserve requirement ratio is a clumsy and often ineffective tool of monetary policy, especially when commercial banks hold excess reserves, and hence are not constrained by the reserve requirement ratio. Lending to commercial banks via the discount or repo windows is also not an effective way to manage base money. Generally, central banks set the discount interest rate 100200 basis points above the inter-bank interest rate to discourage commercial banks from borrowing reserves except in exceptional circumstances. The opposite is the case in Vietnam. The absence of a liquid secondary government bond market limits the use of conventional open-market operations in Vietnam. Instead, the SBV relies mainly on its lending facilities (renance and repo windows) to manage base money, and uses the reserve requirement ratio to adjust the money multiplier. As a result, it is difcult for the SBV to ne-tune monetary policy or take timely actions. In addition, the SBV routinely resorts to non-market administrative measures, such as caps on interest rates, limitations on the growth rate of bank credit, and restrictions on lending to different sectors of the economyall of which create wellknown distortions and inefciencies in the credit market.

(or closely manage) its exchange rate, it has ipso facto chosen a monetary policy. Under a xed exchange rate regime, the central bank is obliged to intervene in the foreign exchange market, buying foreign reserves (R) whenever there is an excess supply, and selling foreign reserves (R) whenever there is an excess demand in the foreign exchange market. When the central bank intervenes, buying and selling foreign exchange reserves, base money goes up and down, and with it (via the money multiplier) the money supply. That is why, as a general rule, a country that xes its exchange rate cannot have an independent monetary policy. The money supply is, in effect, determined by conditions in the foreign exchange market, in other words by international trade and foreign capital ows. There are, however, exceptions to the general rule. One exception is if a country that xes its exchange rate tightly controls supply and demand in the foreign exchange market, for example by strictly controlling foreign capital inows and outows. The other exception is if a country sterilises the monetary effect of its intervention in the foreign exchange market by matching the purchase (sale) of foreign reserves with the sale (purchase) of domestic securities. Through sterilisation, the central bank can, in principle, increase or reduce its foreign reserves without any effect on the size of its balance sheet (that is, without any effect on base money, and hence on the money supply).

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Foreign exchange market intervention

Vietnam pegs its currency to the dollar, but with sporadic adjustments. In spite of these adjustments, which, as noted, have increased in magnitude and frequency in recent years, the SBV has been obliged to intervene heavily in the foreign exchange market to keep the nominal exchange rate within the band that it sets around the ofcial rate. The annual level of central bank intervention is indicated by the change in foreign reserves in the balance of payments, illustrated in Figure 1.
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86 87 88 89 90 91 92 93 94 95 96 97 98

Exchange rate policy as monetary policy

The conduct of monetary policy depends on exchange rate policy. If a country chooses to x

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ASIAN-PACIFIC ECONOMIC LITERATURE

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8 9

Figure 1 Major balances of the balance of payments: quarterly (US$ millions)

10000 8000 6000 4000 2000

Change in Foreign Reserves

Capital Account Balance plus Errors and Ommisions

3
0 Q1 2006Q3 2006Q1 2007Q3 2007Q1 2008Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 -2000 -4000 -6000 -8000

Current Account Balance

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Source: IMF, International Financial Statistics, online.

As Figure 1 indicates, 2007, the year Vietnam acceded to the WTO, was a watershed. Foreign direct and indirect investment in Vietnam soared to a level equivalent to 25 per cent of GDP. After nancing a current account decit of about 10 per cent of GDP, the SBV was obliged to buy foreign reserves equivalent to 15 per cent of GDP. The excess supply of foreign exchange ended in the second quarter of 2008, when foreign (indirect) investors, spooked by rising ination and growing trade decits, made a run on the currency, forcing the SBV (in Q2 2008) to sell back to the market about one third of the US$13 billion in foreign reserves it had purchased from the Q1 2007 through Q1 2008. An excess demand for foreign exchange re-emerged in Q1 2009 and continued through Q3 2010 (the most recent quarter for which IFS balance of payments data are available), as domestic residents attempted to convert dong assets into dollars and gold in anticipation of devaluation. Since much of the domestic capital ight in 2009 and 2010 was via the black
4

market, it showed up in the balance of payments as negative net errors and omissions, that is, unrecorded capital outow. As a result of the foreign capital ight in 2008 and domestic capital ight in 2009 and 2010, all of the foreign exchange reserves accumulated in 2007 and Q1 2008 were sold back to the market (together with an additional US$1 billion) by the end of 2010, leaving the level of reserves at a precariously low level at the beginning of 2011 (Figure 2).

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Sterilisation of market intervention

As Figures 3 and 4 indicate, foreign reserves were the principal component of base money until the SBV was obliged to sell off a large portion of its foreign reserves in 2009 and 2010. In 2007 and Q1 2008, when foreign capital ooded the foreign exchange market, requiring large interventions to prevent nominal appreciation, the SBV undertook to sterilise its reserves purchases, mainly by selling dong-

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PHAM AND RIEDEL ON THE CONDUCT OF MONETARY POLICY

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Figure 2 The capital account plus errors and omissions: quarterly (US$ millions)
10000 8000 6000 4000 2000

Q1
-2000 2006 -4000 -6000

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q3 2008

Q1 2009

Q3 2009

Q1 2010

Q3 2010

Net FDI
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
10

Portfolio Flows

Other Net Flows

E&O

Source: IMF, International Financial Statistics, online. E&O =, FDI = .

denominated sterilisation bonds (claims on the SBV) to commercial banks. However, the level of sterilisation did not match the level of intervention; hence, base money and M2 grew rapidly, leading to an acceleration of ination (discussed below). With the reversal of capital ows from mid2008 onwards, the SBV was again obliged to intervene heavily in the foreign exchange market, selling foreign exchange from its reserves to meet the commercial banks excess demand. To offset the massive reduction in base money that would otherwise have occurred from its sale of foreign exchange to banks, the SBV sterilised its intervention by buying domestic securities and, more signicantly, by lending bank reserves to commercial banks through the SBVs renance and repo lending facilities. As Figures 3 and 4 indicate, the volume of SBV lending to commercial banks exceeded the amount required to sterilise the monetary effect of selling foreign
5

exchange to the commercial banks, thereby allowing for an expansion of base money.

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Instruments of monetary policy in Vietnam

Figures 5 and 6 provide an overview of how the SBV has used the reserve requirement ratio and its lending facilities to manage base money and the money multiplier. From 2006 to early 2009, the growth rate of M2 closely paralleled the growth rate of base money, albeit with more volatility in the growth rate of base money because of seasonal variation in the demand for cash (which, as shown below, is associated with the lunar new year). The close relationship between the average growth rates of base money and M2 until early 2009 implies that, over that period, the money multiplier was fairly constant, as indeed Figure 6 shows it was. However, in

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ASIAN-PACIFIC ECONOMIC LITERATURE

1 2

Figure 3 Level of base money and its components (VND billions)

600000 500000 400000 300000 200000

100000 0 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 -1000002005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 -200000

Net Domestic Assets

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Source: IMF, International Financial Statistics, online.

Net Foreign Assets

Base Money

early 2009, the money multiplier began to rise dramatically, creating an almost 20 percentage point disparity between the growth rates of base money and M2.

Reserve requirement ratio

The money multiplier rises when the ratio of currency in circulation to deposits declines (c), the reserve requirement ratio declines (r), or excess reserves decline (e). As Figure 7 indicates, the currencydeposit ratio has been declining, steadily over the entire period, not abruptly in 2009 when the money multiplier began to rise. Figure 7 also indicates that seasonal factors, in particular the lunar New Year holiday, explain the volatility in base money. The main explanation for the rise in the money multiplier in 2009 and 2010 was a reduction in the reserve requirement ratio and excess reserves, as illustrated in Figure 8. The ineffectiveness of the reserve requirement ratio as an instrument of monetary policy
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when commercial banks hold excess reserves is clearly revealed in the statistics for the year 2007. In 2007, the SBV was obliged to buy up commercial banks excess supply of foreign exchange, consequent on massive inows of foreign capital. In an attempt to sterilise the monetary impact of its foreign exchange purchases, the SBV, in mid-2007, more than doubled the reserve requirement ratio, but, as indicated in Figure 4, this move did not have the expected effect of lowering the money multiplier. The reason it did not, as Figure 6 indicates, is because commercial banks, at that time, were holding a large stock of excess reserves at the SBV, and hence were not constrained by the reserve requirement ratio. As a result, the rise in the reserve requirement ratio did not force banks to rein in credit growth. Recall that in 2009, the government implemented a stimulus policy to counter the deationary effects of the global recession. At the same time, capital ight required the government to sell off a substantial amount of foreign

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PHAM AND RIEDEL ON THE CONDUCT OF MONETARY POLICY

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Figure 4 Change (YOY) in base money and its components (VND billions)
200000

150000

100000

50000
3

0 M1 2006 -50000

M1 2007

M1 2008

M1 2009

M1 2010

M1 2011

-100000

-150000 Change in NFA

4 5 6 7 8

Change in Net Claims on Govt Change in Net Claims on Banks

11

Source: IMF, International Financial Statistics, online. NFA = .

Figure 5 Rate of growth of base money and M2: January 2006 through October 2010 (%)
70 60 50 40 30

20 10 0 M1 -102006 -20 M7 2006 M1 2007 M7 2007 M1 2008 M7 2008 M1 2009 M7 2009 M1 2010 M7 2010 M1 2011

M2 Growth Rate
10
Source: IMF, International Financial Statistics, online.

Base Money Growth Rate

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ASIAN-PACIFIC ECONOMIC LITERATURE

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6.0

Figure 6 The money multiplier: January 2005 through October 2010

5.5

5.0

4.5

3
4.0

3.5

3.0 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011

4 5 6 7

Source: IMF, International Financial Statistics, online.

Figure 7 Currency/deposit ratio: January 2005 to October 2010

0.35 Ratio of Currency in Circulation to Total Deposits

0.30

0.25

8
0.20

0.15

0.10 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011

9 10 11 12 13 14

Sources: IMF, International Financial Statistics, online; State Bank of Vietnam, online.

reserves to prevent an even larger devaluation of the dong than occurred. To sterilise the monetary effect of selling off foreign reserves and to stimulate the economy by easing credit condi8

tions, the SBV lowered the reserve requirement ratio from about 12 per cent to only 2 per cent. The reserve requirement ratio was not revised upward until early 2011, even though by early

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PHAM AND RIEDEL ON THE CONDUCT OF MONETARY POLICY

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Figure 8 Ratio of reserves to dong and total deposits and the reserve requirement ratio
0.25

0.20

Ratio of Reserves to Dong Deposits

0.15

Ratio of Reserves to Total Deposits

3
0.10

0.05

Reserve Requirement Ratio

0.00 M1 2006 M7 2006 M1 2007 M7 2007 M1 2008 M7 2008 M1 2009 M7 2009 M1 2010 M7 2010 M1 2011

Sources: IMF, International Financial Statistics, online; State Bank of Vietnam, online.

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

2010, it was acknowledged that the economy was overheating and monetary tightening was called for. Lowering the reserve requirement ratio in 2009 worked to raise the money multiplier as the SBV intended it to do, but when macroeconomic conditions changed in 2010, the SBV failed to respond by raising r.

Net claims on commercial banks

The SBV has also used its renance and reverse repo lending facilities to sterilise foreign exchange market intervention and manage base money. In 2007 and early 2008, the SBV issued compulsory sterilisation bonds to commercial banks to absorb, at least partially, excess banks reserves created by SBV foreign exchange purchases from commercial banks. When the foreign capital ow reversed direction, in particular in 2009 and 2010, the SBV used its lending facilities to replace declining bank reserves consequent on its foreign exchange sales to commercial banks. The magnitude of SBV borrowing from commercial banks (through the issuance of
9

compulsory sterilisation bonds) and lending to commercial banks (through the renance and reverse repo facilities) is shown in Figure 9. The commercial banks were compelled to hold sterilisation bonds in 2007 and 2008, but they were not compelled to borrow from the SBV to sterilise the sale of foreign exchange to the commercial banks in 2009 and 2010. Instead, the commercial banks were offered the opportunity to borrow reserves at interest rates well below market rates (even below the inter-bank rate), creating protable interest arbitrage opportunities. Consequently, commercial banks borrowed heavily from the SBV, at least until April 2011, when spiralling ination eventually led the SBV to raise its lending rates from 7 per cent to 15 per cent, signicantly reducing (if not eliminating) the protability of borrowing reserves. As a result of the banks massive borrowing from the SBV, net reserves (commercial banks deposits at the SBV minus net borrowing from the state bank) fell precipitously to negative levels by the end of 2010, eliminating entirely the liquidity cushion that bank reserves provide (Figure 10).

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ASIAN-PACIFIC ECONOMIC LITERATURE

1 2

Figure 9 SBV borrowing from and lending to commercial banks (VND bill)
250000

200000

150000

SBV Loans to Commercial Banks via Discount & Repo Windows

100000
3

50000

0 M1 2005 -50000

M1 2006

M1 2007

M1 2008

M1 2009

M1 2010

M1 2011

SBV Sterilization Bonds Issue to Banks

-100000
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Source: IMF, International Financial Statistics, online. SBV = State Bank of Vietnam.

The growth of base money, M2, and ination

As Figure 11 indicates, Vietnam experienced two surges in money and credit growth over the past ve years. The rst, in 2007 and 2008, was driven by the monetisation of massive capital inows that were only partially sterilised. The second, in 2009 and 2010, resulted from the rise in the money multiplier consequent on reductions in the reserve requirement ratio, and by growth in central bank credit to commercial banks that more than offset the decline in base money consequent on declining foreign reserves. As Figure 12 suggests, the surge in money and credit growth in 200708 and again in 2009 and 2010 was accompanied by a rise in the ination rate, validating the well-known proposition that ination is always and everywhere a monetary phenomenon.
10

Conclusion
The SBVs attempts to sterilise its heavy intervention in the foreign exchange market are what have largely formed its conduct of monetary policy in recent years. Since sterilisation is a means of nessing rather than correcting the market disequilibria that required intervention in the rst place, the SBV has been forced to adjust the rate at which it pegs the dong to the dollar repeatedly and in ever larger amounts. Moreover, the sterilisation tools at its disposal have not been up to the task, as two waves of double-digit ination in the past ve years attest. One solution might be to oat the currency, but that would simply shift the problem, not solve it. Surges in capital inows and outows that are of magnitude of those of recent years would have caused major swings in the

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Figure 10 Net bank reserves as a % of deposits

0.20

0.15

Ratio of Reserves to Deposits

0.10

0.05

Ratio of Net Reserves to Deposits

0.00 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 M7 M1 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 -0.05

-0.10
4 5 6 7
Source: IMF, International Financial Statistics, online.

Figure 11 Monthly (YOY) money and credit growth rates (percentages)

60

Credit Growth Rate

55 50 45 40 35

8
30 25 20 15 10 M1 2006 M7 2006 M1 2007 M7 2007 M1 2008 M7 2008 M1 2009 M7 2009 M1 2010 M7 2010 M1 2011

M2 Growth Rate

Source: IMF, International Financial Statistics, online.

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ASIAN-PACIFIC ECONOMIC LITERATURE

1 2

Figure 12 Monthly (YOY) money and credit growth rates (lagged) and the CPI ination rate
70 60 50 40

Rate of Growth of Credit (lagged 6 months)

30 20 10 0 M9 M1 M5 M9 M1 M5 M9 M1 M5 M9 M1 M5 M9 M1 M5 2006 2007 2007 2007 2008 2008 2008 2009 2009 2009 2010 2010 2010 2011 2011

Rate of Growth of M2 (lagged 9 months) CPI Inflation Rate

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Source: IMF, International Financial Statistics, online.

nominal and real exchange rate, with deleterious consequences for resource allocation and growth every bit as severe as those associated with monetary instability. Given the importance of export-oriented industrialisation and the under-development of Vietnams nancial sector, Vietnam is currently in no position to oat its currency. One step that could be taken to strengthen the conduct of monetary policy would be to tighten controls on capital ows. Recent measures aimed at restricting gold trading and discouraging the holding of dollar deposits in the banking system are, in essence, forms of capital control. Although these measures have been credited with easing pressure on the currency, it remains to be seen how effective they will turn out to be, since such controls have been found to be notoriously ineffective when differentials on expected returns in domestic and foreign currencies are high. Nonetheless, it would seem to be an auspicious time for the SBV to review its policy on capital controls. Financial liberalisation and development of a liquid bond market are overdue. These measures would strengthen the conduct of mon12

etary policy, and they would facilitate the nancing of the government decits and provide an important instrument for nancing long-term investment. Financial liberalisation would also help the SBV to wean itself from its overreliance on administrative measures, such as caps on interest rates, targets on credit growth, and quotas on lending by sector, which distort credit markets and lead to misallocation of Vietnams scarcest resource capital. Macroeconomic policy is difcult as it can only be understood in a general equilibrium framework. The goods market, money market, and foreign exchange market are inextricably linked by a unique conguration of relative pricesthe interest rate, exchange rate, and ination rate. That being the case, the authorities can attempt to anchor the macroeconomy by xing (or targeting) one of those relative prices, but it cannot simultaneously target all of them. Attempting to do so by administrative directives, as the SBV wont do, all but guarantees that macro disequilibrium in one manifestation or another will be a permanent feature of the economy.

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Dear Author, During the preparation of your manuscript for publication, the questions listed below have arisen. Please attend to these matters and return this form with your proof. Many thanks for your assistance.

Query References q1

Query AUTHOR: A short title running head was not supplied. Please check if this one is suitable and, if not, please supply a short title that can be used as a running head. AUTHOR: Please suppy current position title of the authors (e.g. researcher, professor, etc.). AUTHOR: Please note that A Stylised Version of the Financial System has been set as Table 1. Please check and conrm that this is OK. Also, please check if the entries in the table are correct. AUTHOR: As Table 1 has not been mentioned in the text, an attempt has been made to insert a Table 1 citation into a relevant point in the text. Please check and conrm that this is OK; otherwise, please provide clear guidance on where it should be mentioned in the text. AUTHOR: Please provide the full form of IFS. AUTHOR: Figures 2 and 10 was not mentioned in the text. An attempt has been made to insert Figure 2 and Figure 10 citations into a relevant point in the text. Please check that these are OK. If not, please provide clear guidance on where these should be mentioned in the text. AUTHOR: Attempting to do so by administrative . . . This sentence has been reworded for clarity. Please check and conrm that it is correct. AUTHOR: Please note that, as per journal style, colored gures have been converted to black and white. If you would like the gures published in color, please contact the production editor. AUTHOR: Please check and conrm that the sources of Figures 112 are correct. AUTHOR: Please supply the full form of E&O and FDI in Figure 2. AUTHOR: Please supply the full form of NFA in Figure 4.

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