Sübidey Togan and Hasan Ersel* During the last three decades Turkey has experienced three balance of payments crises. The ﬁrst crisis occurred in late 1970s, the second in 1994 and the third in 2001. These crises highlighted the danger of having too large current account deﬁcits when coupled with other weaknesses in the economy. The crises occurred when Turkey was facing large ﬁscal deﬁcits and high inﬂation rates, and when the current account deﬁcits during the periods prior to the crises were largely ﬁnanced by short-term foreign borrowing. During the 1990s the unhealthy structure of the ﬁnancial sector contributed to the worsening economic situation.1 Currency and maturity mismatches on the balance sheets of the banks had left the public authorities little leeway for using either interest rate or exchange rate adjustments to restore the external balance without undermining the stability of the banking sector. Furthermore Turkey lacked competent supervisory authorities and a regulatory framework in the banking sector. Finally, prior to the 2001 crisis Turkey had accumulated huge debts. Thus Turkey before the 2001 crisis had neither resolved its ﬁscal problems, nor attained price stability, and it did not have a sound banking sector. There were also major problems with governance in general. The past few years have witnessed three major attempts at addressing underlying weaknesses. The ﬁrst was during 2000 under the three-year stand-by agreement with the IMF initiated in December 1999, following a signiﬁcant drop in output as a result of mostly...
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