The paper investigates questions relating to reserves adequacy, optimality, and adjustment for seventeen Arab countries during the period 1980-2002. In section II we analyze reserve adequacy from the vantage of three reserve ratios: reserves to imports, to capture current account sustainability; reserves to short-term debt, to assess debt sustainability; and reserves to broad money, to conjecture the extent of capital flight. The determinants of optimal reserves are discussed in section III, and we arrive at results that support the importance of both the transactions and precautionary motives for holding reserves. Section IV estimates adjustment coefficients for different groups of Arab countries, and also checks which Arab countries have their reserves depart the most from fundamentals. In this context, reform countries appear to have speedier adjustments, and Algeria stands out as the country with the largest excess in reserves. Section V concludes the paper with some policy recommendations.
