After a severe financial crisis and deep recession in 2001, Turkey’s policy goal is to enter a sustained recovery while taking measures to address the root causes of the crisis. The underlying reasons for the crisis had been building over the previous decade, notably a fragile banking system, weaknesses in the structural fiscal adjustment, as well as contagion effects from financial crises elsewhere. Against this background, a political dispute with a swelling current account deficit triggered the collapse of the three-year exchange-rate based stabilisation programme in February 2001, only 14 months after its launch. The crawling peg for the Turkish lira was abandoned and real interest rates skyrocketed, precipitating a banking crisis, which was followed by a deep recession accompanied by higher inflation and rising unemployment. A strengthened programme, backed by substantial international financial support, is intended to permit a gradual return of confidence, a sounder banking system and easing in financial market conditions, while the deep recession and a newly independent Central Bank have facilitated a rapid return to the disinflation path. Early signs of an inventory and export led recovery appeared in 2002. However, renewed political tensions in mid-2002 sparked a brief turmoil in financial markets, and may have interrupted the improving trend, while persisting market concerns about the continuity of the programme because of early elections have subsequently kept the sovereign risk premium at high levels. On the other hand, appropriate economic policies remain in place while recent political developments represent not only risks but also opportunities to show that ownership of the programme is shared by all the political parties garnering public support and that newly established institutional structures for economic management are robust to changes in government...