Academic literature on the topic 'First oil shock'

This paper seeks to answer the following questions: Do oil price shocks affect firms' investment decisions? Do oil price shocks affect investment decisions differentially depending on firm-specific uncertainty? Over what time horizon do oil price shocks affect high-uncertainty firms? Is the intensity of the oil price shock important, or just its existence? It is found that oil price shocks depress firms' investment decisions, and do so differentially by depressing investment more for more uncertain firms. Oil shocks affect investment for at least the first and second year after the shock. In the short term, the mere existence of a shock drives most of the effect. In the long term, the intensity of the oil shock is also important. Bloom, Bond, and Van Reenan's result [Review of Economic Studies 74, 391–415 (2007)] regarding responsiveness to demand shocks being eroded at more uncertain firms for data on U.K. firms is replicated using data on U.S. firms and persists after oil shocks are considered.

OPEC countries are heavily dependent on oil dollar revenues through which impact on exchange rates. The purpose of this study is to investigate the effect of oil shocks on the real exchange rates for selected OPEC countries for the period 1980-2018. The oil shocks are first obtained using the vector auto-regression model and then their effects on the exchange rates are estimated using a panel quantile regression model. The results show that effect of oil shocks on exchange rates varies across quantiles. The oil specific-demand shock and global demand shock have a negative and significant effect on the real exchange rates while the oil supply shock has a positive and significant effect on the real exchange rates in OPEC countries. Furthermore, oil specific-demand shock has the most impact on the real exchange rates.

This study investigates the time-varying effects of three types of oil price shocks (oil demand, supply, and risk shock) on exchange rates by applying the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) model. Through examining the impulse response of exchange rates to oil price shocks at different lag periods and time points, this paper contributes to the existing literature on the dynamic relationship between oil shocks and exchange rates. From the response at different lag periods, we find that oil price shocks have a significant time-varying impact on the exchange rate, among which oil demand shock has the most significant effect. The response of the exchange rate market to oil price shock shows an obvious short-term time-varying effect and is positive and negative alternately, with a certain periodicity. From the response at different time points, the time-varying effect of oil price shock on exchange rates is related to external shock, and is more intense during the global economic and political turmoil. This is the first empirical study using a novel method to examine the time-varying effects of oil price shock from different sources on exchange rates, providing investors and policy makers assistance to manage foreign exchange during global turmoil periods.

This paper considers a time-varying parameter vector autoregression model to analyze the varying impact of three types of structural oil shocks (the supply-side shock, the aggregate demand shock, and the oil-specific demand shock) on the European stock market since the 1990s. Our findings show that the three types of oil shocks heterogeneously influence stock market returns in the euro area, and that this influence considerably changes over time during the period considered. First, an unexpected increase in oil supply appears to exert a positive but generally declining effect in the period before the Global Financial Crisis (GFC) of 2007–2009, which descends into negative values after the GFC. Second, an unanticipated increase in aggregate demand triggers a generally positive effect on stock market returns in the euro area. However, in the period from 2003 to 2005, stock market returns responded negatively, which could be attributed to the so-called growth-retarding effect. Third, an unexpected increase in oil-specific demand instigates a negative response in the pre-GFC period (considering the response 4–5 months after the shock), although this changes to a positive effect thereafter. Interestingly, irrespective of the origin of oil price fluctuations, oil price increases are associated with positive European stock market returns after the GFC. This signals a greater degree of oil market financialization.

Purpose The purpose of this paper is to assess whether oil price shocks emanating from oil price increase and decrease have a different impact on the macroeconomic activity. Design/methodology/approach This study conducts the empirical analysis using structural vector auto-regressive model on Indian data for the period from 1996 to 2017. This paper uses four key macroeconomic variables, namely, real gross domestic product (GDP), the real rate of interest, real money supply, wholesale price index inflation and various linear and non-linear measures of oil price shock. Findings Empirical results confirm that oil price shock has a significant impact on various macroeconomic variables used in the study. Specifically, shocks emanating from a decline in oil price have a stronger positive impact on real GDP, whereas, a shock due to the rise in oil price has a weaker negative impact on real GDP. Impulse responses confirm that shocks due to a decline in oil prices are long-lasting compared to similar shocks due to a rise in oil prices. Therefore, this study concludes that the macroeconomic impact of oil price shock is asymmetric in India. Originality/value This paper adds the following new insights: First, this paper presents a distinct relationship between the growth rate of oil price and GDP during increasing and decreasing phases of oil price to drive home the case for this study. Second, India has adopted crucial administrative initiatives such as deregulation of the market for petroleum products and the promotion of renewable energy during the study period. Finally, previous studies have revealed specific behavioral and economic features of people in India with respect to the demand for petroleum products. In light of these factors, this paper based on Indian experience would be justified.

This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

The paper is devoted to the study of approaches to assessing the impact of external macroeconomic shocks on the Russian stock market. A sharp drop in oil prices (oil shock) is considered as a macroeconomic shock. The analysis of possible approaches to solving this problem is carried out, and their theoretical generalization is given. Based on an extensive sample of daily values of prices for Brent oil and the Russian stock index RTS for the period from 1998 to the first half of 2020, a study was conducted on the dependence of the domestic stock market on the global oil market. An approach to assessing the impact of oil shocks based on the use of vector autoregression models (VAR-model) is proposed. The VAR model has been developed and tested for the Russian stock market, its capabilities and limitations have been shown, and practical recommendations for its further development have been provided.

The Russia-Ukraine conflict is expected to impact India’s economy through several channels but we posit first order impacts will emanate from higher crude prices. If crude prices were to average $100/barrel in 2022, they will constitute a discernible adverse terms of trade shock for India’s economy that could shave a percentage point off India’s growth, pressure inflation further and widen the current account deficit towards 3% of GDP. How should policy respond? A negative terms of trade shock would argue for a more depreciated equilibrium real effective exchange rate. Policymakers should let this adjustment gradually take place to enable the corresponding “expenditure switching” needed to bring external imbalances back to sustainable levels. A sustained supply shock will make the trade-off for monetary policy more acute, with downside risks to growth accompanied by upside risks to inflation expectations. While the 2022-23 Budget created buffers to protect against shocks, fiscal policy will face its own set of trade-offs in simultaneously attempting to accommodate the shock, support growth and preserve macroeconomic stability. Beyond the near term, policymakers must consider systematically hedging crude price imports in global markets to protect the economy from periods of outsized volatility, apart from the medium-term objective of reducing dependence on imported crude.

Il lavoro mira a fornire un quadro interpretativo in cui collocare la straordinaria ascesa dei prezzi che, a partire dai primi anni Duemila, portò il greggio a sfiorare i 150 dollari al barile nel luglio 2008. Dopo una panoramica delle cause più spesso invocate dagli addetti ai lavori nell'ambito di un vero e proprio dibattito politico e accademico, si evidenziano le condizioni sine qua non del darsi della crisi petrolifera, ossia una capacità produttiva inutilizzata ridotta ai minimi termini e un settore di raffinazione inadeguato a distillare la sempre più crescente offerta di petroli pesanti nei mercati internazionali. A queste, l'analisi aggiunge la congiunzione di alcuni eventi, che insieme, sono in grado di giustificare l'impennata dei prezzi in questione. Tra queste, le dinamiche della domanda e dell'offerta acquisiscono un ruolo centrale, per via, da un lato, della crescente sete di petrolio da parte delle economie emergenti e, dall'altro, di un'offerta incapace di stare al passo. Nella parte centrale, il quadro si estende al contributo dell'OPEC, ma soprattutto ai mercati finanziari, per via di un aumento dei prezzi che a partire dal 2005, assume sempre più i contorni di un bolla speculativa. L'epilogo è interamente dedicato all'altrettanto straordinario crollo dei prezzi, avvenuto tra luglio e dicembre 2008, quando l'oro nero si assestò intorno ai 30 dollari al barile, ma anche alle conseguenze macroeconomiche dello "shock" petrolifero lungo la decade.

Au sortir de la Seconde guerre mondiale, la France tire ses leçons de ce conflit. L’énergie est utilisée à des fins géostratégiques et géopolitiques de démonstration de puissance. Les deux grandes guerres mondiales révèlent ainsi, le pétrole comme un objet d’influence, de rapport et de force capable d’octroyer la victoire à quiconque le possède. À cet effet, comme le souligne le Comte de Fels : « La Nation qui n’a pas de pétrole, n’aura plus désormais de marine, d’armée et de crédit, et tombera dans la catégorie humiliée des nations subordonnées (…). Sans pétrole, il n’y a pas de véritable indépendance nationale ! ». C’est ainsi que l’ensemble des États se lancent dans une course effrénée pour l’obtention de cette huile noire par tous les moyens possibles. La France ne possédant pas de réelles potentialités pétrolières sur son territoire, se tourne ainsi vers son immense empire colonial. Le 1er novembre 1954, on assiste à la première découverte pétrolière française commercialement exploitable, dans le Sahara algérien. Malheureusement cette découverte se déroule au moment même où commence la guerre de libération nationale algérienne. Cette découverte pétrolière est utilisée par les Algériens comme outil de chantage dans les négociations entre l’Algérie et la France. Ces négociations aboutissent à une scission au profit d’une indépendance quasi-totale de l’Algérie. Quelques années plus tard, la France fait une importante découverte en Afrique équatoriale française sur l’île d’Ozouri (actuel Port-Gentil) au Gabon. Cette dernière est suivie de plusieurs autres découvertes de gisements pétroliers et gaziers en Afrique centrale, tant au Gabon qu’au Congo-Brazzaville. C’est ainsi que la France fonde ses espoirs dorénavant sur le Gabon. Cette découverte d’or noir permet, non seulement à la France de s’approvisionner en pétrole, mais aussi de pouvoir occuper une place respectable dans le grand concert des nations. Ces découvertes d’hydrocarbures participent, sans équivoque, à la naissance du groupe pétrolier français ELF. L’Afrique centrale en générale, et le Gabon en particulier, constitue un atout important dans la réalisation de la vision d’antan d’un pétrole « franc », et sur le long terme, à celle d’une industrie pétrolière nationale française
At the end of the Second World War, France learnt its lessons from this conflict. Energy was used for geostrategic and geopolitical purposes to demonstrate power. The two great world wars thus revealed oil as an object of influence, relationship and strength capable of granting victory to whoever possessed it. To this end, as the Count of Fels points out: "The nation that has no oil will no longer have a navy, an army and credit, and will fall into the humiliated category of subordinate nations (...). Without oil, there is no real national independence". Thus, all the states embarked on a frantic race to obtain this black oil by all possible means. Since France had no real oil potential on its territory, it turned to its immense colonial empire. On 1 November 1954, the first commercially exploitable French oil discovery was made in the Algerian Sahara. Unfortunately, this discovery took place at the same time as the Algerian national liberation war. This oil discovery was used by the Algerians as a blackmail tool in the negotiations between Algeria and France. These negotiations led to a split in favor of almost total independence for Algeria. A few years later, France made an important discovery in French Equatorial Africa on the island of Ozouri (now Port-Gentil) in Gabon. This was followed by several other oil and gas discoveries in Central Africa, both in Gabon and in Congo-Brazzaville. This is how France is now pinning its hopes on Gabon. This discovery of black gold not only enables France to obtain oil supplies, but also to occupy a respectable place in the great concert of nations. These discoveries of hydrocarbons unequivocally contributed to the birth of the French oil group ELF. Central Africa in general, and Gabon in particular, is an important asset in the realization of the vision of the past of a "free" oil, and in the long term, of a French national oil industry
عد الحرب العالمية الثانية، تعلمت فرنسا من هذا الصراع. تُستخدم الطاقة لأغراض عرض الطاقة الجيوستراتيجية والجيوسياسية. وهكذا تكشف الحربان العالميتان الكبيرتان عن النفط كهدف للنفوذ والعلاقة والقوة قادر على منح النصر لمن يمتلكه. ولهذه الغاية، كما يشير كونت فيلس، "الأمة التي ليس لديها نفط، لن يكون لها بعد الآن بحرية وجيش وائتمان، وستندرج في الفئة المهينة من الدول التابعة (...). بدون النفط، لا يوجد استقلال وطني حقيقي! " هذه هي الطريقة التي تشرع بها جميع الدول في سباق محموم للحصول على هذا النفط الأسود بكل الوسائل الممكنة. لم يكن لدى فرنسا أي إمكانات نفطية حقيقية على أراضيها، لذلك لجأت إلى إمبراطوريتها الاستعمارية الهائلة. في 1 نوفمبر 1954، شهدنا أول اكتشاف نفطي فرنسي قابل للاستغلال التجاري في الصحراء الجزائرية. لسوء الحظ، يحدث هذا الاكتشاف في نفس اللحظة التي تبدأ فيها حرب التحرير الوطني الجزائرية. استخدم الجزائريون هذا الاكتشاف النفطي كأداة للابتزاز في المفاوضات بين الجزائر وفرنسا. أدت هذه المفاوضات إلى انقسام لصالح استقلال شبه كامل للجزائر. بعد بضع سنوات، اكتشفت فرنسا اكتشافًا مهمًا في إفريقيا الاستوائية الفرنسية في جزيرة أوزوري (الآن بورت جنتيل) في الغابون. ويتبع هذا الأخير العديد من الاكتشافات الأخرى للنفط والغاز في وسط إفريقيا، في كل من الغابون والكونغو برازافيل. هكذا تبني فرنسا آمالها الآن على الغابون. هذا الاكتشاف للذهب الأسود يسمح لفرنسا ليس فقط بمصدر النفط، ولكن أيضًا باحتلال مكان محترم في حفلة الأمم العظيمة. من الواضح أن هذه الاكتشافات الهيدروكربونية هي جزء من ولادة مجموعة النفط الفرنسية elf. ووسط أفريقيا بوجه عام، وغابون بوجه خاص، رصيد هام في تحقيق الرؤية القديمة للنفط «الفرنك»، وفي الأجل الطويل، رؤية صناعة النفط الوطنية الفرنسية

The Organization of the Petroleum Exporting Countries (OPEC) is one of the most recognizable acronyms among international organizations. It is mainly associated with the “oil shock” of 1973 when the price of petroleum increased fourfold and industrialized countries and consumers were forced to face the limits of their development model. This is the first history of OPEC and of its members written by a professional historian. It carries the reader from the formation of the first petrostate in the world, Venezuela in the late 1920s, to the global ascent of petrostates and OPEC in the 1970s, to their crisis at the end of the 1980s and beginning of the 1990s. Born in 1960, OPEC was the first international organization of the Global South. It was widely perceived as acting as the economic “spearhead” of the Global South and acquired a role that went far beyond the realm of oil politics. Petrostates such as Venezuela, Nigeria, Algeria, Saudi Arabia, Iraq, Iran, have been (and still are) key regional actors and their enduring cooperation, defying wide political and cultural differences and even wars, speaks to the centrality of natural resources in the history of the twentieth century, and to the underlying conflict between producers and consumers of these natural resources. Being the first study to use previously unavailable OPEC sources, it offers surprising insights into the way of thinking of the ruling elites in petrostates and to the way the world looks when seen through their eyes.

In this chapter, we consider the ‘miracle’ in its heady heyday of exceptionally fast growth rates and structural transformation from the mid 1980s to the eve of the Asian financial crisis in the mid to late 1990s. We argue for a simpler explanation of rapid growth and structural transformation in this period in South East Asia. That is, that changes in international prices—the global oil price shock—induced a crisis. Then a new form of developmentalism evolved which opportunistically took advantage of another change in global prices—national exchange rates vis-à-vis the US dollar and yen, and global versus national interest rate differentials—to trigger, respectively, large inflows of foreign direct investment and finance capital. These inflows were attracted by what the first era of developmentalism had built in infrastructure, financial systems, and human capital, and drove growth and employment until the exchange rate advantage diminished.

Over the last six decades, economic developments in the three countries that were defeated in World War II look strikingly similar. First came rapid reconstruction. Then followed the economic miracles of the Golden Age. The years that went from the first oil shock to the mid-1990s still saw fairly robust, and relatively similar, economic developments. Finally, during the last 15 years, the three countries held the dubious record of having the lowest output growth rates in the OECD area. The chapter looks primarily at Italy, using the examples of Germany and Japan to search for parallels and contrasts. Among the similarities, the main one lies in overall macroeconomic trends. The main differences are in economic policies (where Germany and Japan followed a much more orthodox stance than Italy), in labor market relations (with much greater conflict in Italy than in the other two countries), and in regional developments (where Italy was handicapped by theMezzogiorno). Indeed, had Italy's government institutions, labor market relations and regional differentials been less problematic, Italy's growth performance might well have been superior to that of Germany and Japan.

Tool Steels, Fifth Edition provides tutorial explanations along with engineering data on the production, selection, and use of tool steels and related materials. The first six chapters cover topics of a general nature including tool steel classifications and selection factors, primary production processes, the effects of alloying on microstructure and phase composition, and the theory and practice of tool steel heat treatments. The chapters that follow cover specific types or families of tool steels including water-hardening, low-alloy special-purpose, shock-resisting, oil- and air-hardening cold-work, high-carbon high-chromium cold-work, hot-work, and high-speed types as well as mold steels. Each chapter presents information and data on composition, microstructure, processing, properties, and performance. The current edition also includes two new chapters, one on surface modifications and one that provides guidelines for troubleshooting tool steel manufacturing and performance problems. For information on the print version, ISBN 978-0-87170-599-0, follow this link.

This chapter examines how, in 1973, US president Richard Nixon faced anger and distrust from the US public because of high rates of inflation and the contributing factor of rising oil prices. While the Nixon administration accepted a moderate increase in the cost of MENA (Middle East and North Africa) oil, it opposed a major price rise that would harm the Western economies. Moreover, it expected MENA allies to not challenge key US strategic prerogatives. In October of 1973, the oil-rich countries would defy the United States on both counts. First, the Gulf countries would unilaterally raise the price of their oil by 70 percent, the opening salvo in a series of price hikes that ended the period of cheap global petroleum for over a decade. Second, the Arab countries, including US allies, openly threatened US influence in the MENA by launching an impactful oil embargo against the United States in response to its support for Israel during the latest Arab–Israeli War. These two overlapping events attacked the foundations of US cooperative international empire in the MENA and the larger geopolitical and economic order the United States had instituted over much of the world since World War II.

Abstract Nigeria attained its political independence from British colonial rule in 1960 and the economy experienced a period of relative calm over the next four or five years. But between 1966 and 1990, the Nigerian economy experienced a series of shocks of varying magnitudes. Not all of these can be classified as trade shocks, temporary or permanent, but neither were all of them necessarily negative. In fact, it is commonly agreed that as a member of the Organization of Petroleum Exporting Countries (OPEC) and as exporter of the much sought after premium Bonny light crude oil, Nigeria derived a large wealth transfer from the oil price increases which occurred first during 1973-74 and again during 1979-80 (Gelb 1986; Oyejide 1986; Pinto 1987).

Chapter 7 describes the rise of non-OPEC oil production, especially in the UK, Norway, and Mexico, and the start of the price-slump at the beginning of the 1980s, also due to increased production coming from these new oil regions. The chapter goes on to explain how OPEC transformed itself for the first time into a cartel, trying to set at the same time the price of petroleum and production levels for its members, and then deals with the failure of such an approach, first with the Saudi struggle for “market share” in the latter half of 1985, and then with the resulting oil “counter-shock” of 1986 after which OPEC lost its power to control prices.

Abstract This chapter shows how the continuing flood of Middle Eastern oil not only brought prosperity to the Federal Republic, but also created problems that further politicized energy in West Germany in the 1960s. First, the accelerating transition to oil forced down hard coal consumption in West Germany, creating stranded assets as mine owners struggled to get out of a dying industry. This sparked West Germany’s second coal crisis, in 1966, which led to unemployment, social disorder, and the reorganization of Ruhr coal into a massive enterprise with no precedent. But the onslaught of Middle Eastern oil also made the Federal Republic dependent on foreign energy, and exposed to developments beyond German borders and over which Germans had little control. Well before the 1973 oil shock, West Germans became intensely concerned with the twin challenges of the domestic and international security of energy, and their leaders began to depart from Ordoliberalism by favoring large, German-owned enterprises that could survive a volatile energy landscape.

Abstract Japan’s economy achieved great success in its overall performance until the late 1980s. It had attained the highest rate of economic growth among major industrial countries with no serious problems of unemployment or inflation. Perhaps the first oil shock, caused by the oil embargo of the Arab countries, was an epoch-making incident in that Japan’s weakness became evident, along with its vulnerability as a very resource-poor country. However, the damage of the first oil crisis was successfully limited by cooperation between private business and government policy. After overcoming the initial hardship of the 1970s, Japan emerged as an economic superpower in the 1980s. At the end of the twentieth century Japan is considered to be one of the more significant world economies, along with the USA and Germany, which should be responsible for the stable growth of the world economy.

Abstract Social sustainability is a relatively new concept which has arisen out of criticism of policy implementation aimed at both the macroeconomic and the micro-( project) levels. The macro-criticism arose in large measure out of the disappointing results of the structural adjustment programmes that were executed with increasing frequency following the first oil shock (Reed 1996). The microeconomic criticism stems from allegations that grass-roots opinion has been neglected in project design and execution, at the cost of both (O’Brien 1997). The effectiveness of macroeconomic, micro and environmental policies for sustainable mineral-driven development will be seriously impaired if the socio-political constraints upon their implementation are neglected.

The Iraqi economy suffers from a triple shock, the first shock represented by the demonstrations that erupted in November 2019, the second shock related to the collapse of oil prices and the reduction of its production under the OPEC + agreement, and the third shock represented by the Corona pandemic and the resulting shock of supply and demand at the same time, and then led to slowing economic growth. The problems of the Iraqi economy are related to the rentier economy, which made the state control its relations with society with the presence of oil rents and dependence on it, which made it move away from its society, and thus weakened the effectiveness of the role of civil society institutions or their supervisory role, especially in the economic issue. The Iraqi economy's dependence on oil in its movement has become sensitive to external and internal shocks, so the research will focus on the development of fiscal policy in Iraq after 2003 in light of the shocks it has been exposed to and their effects on economic activity.

The Iraqi economy suffers from a triple shock, the first shock represented by the demonstrations that erupted in November 2019, the second shock related to the collapse of oil prices and the reduction of its production under the OPEC + agreement, and the third shock represented by the Corona pandemic and the resulting shock of supply and demand at the same time, and then led to slowing economic growth. The problems of the Iraqi economy are related to the rentier economy, which made the state control its relations with society with the presence of oil rents and dependence on it, which made it move away from its society, and thus weakened the effectiveness of the role of civil society institutions or their supervisory role, especially in the economic issue. The Iraqi economy's dependence on oil in its movement has become sensitive to external and internal shocks, so the research will focus on the development of fiscal policy in Iraq after 2003 in light of the shocks it has been exposed to and their effects on economic activity.

Abstract Rising interest in hydrogen as an alternative energy source calls for investigation into how to produce, store and extract hydrogen efficiently from subsurface aquifers. This work studies the storage and extraction of hydrogen underground in aquifers using fractional flow theory. The similarity between injection (to store) and production (to extract) of hydrogen into and from the subsurface is how we define flow reversibility in this work. First, we identify possible sources of irreversibility from the general fractional flow equations because these express how much of the injected hydrogen can be recovered. Full reversibility means that all the injectant will be recovered. Then, we examine, case by case, how shock formation, trapping hysteresis and gravity impact flow reversibility. Finally, we study how the shape of fractional flow curve and residual saturation hysteresis curve quantitatively affect flow reversibility. We establish two types of reversibility. Reversibility of the first kind belongs to processes where the forward and reverse displacements are time symmetrical; such processes do not form shocks. Reversibility of the second kind refers to scenarios where key observables measured by an observer are not hysteretic. Hence, this study establishes several points of interest in quantifying hysteresis caused by flow reversal. For hydrogen storage and extraction, we identify that both gravity and trapping hysteresis contribute to irreversibility of the first kind; gravity does not directly cause irreversibility of the second kind while trapping hysteresis necessarily does. Both kinds of irreversibility are associated with time asymmetry, with the second kind of irreversibility being incapsulated by the first kind of irreversibility.

The safety of oil and gas pipelines has increasingly considered day by day to their vulnerability. Pipelines play a very critical role in the transportation of oil and natural-gas. As they have become the veins of oil industries, the productive design and analysis became more important. This made them more vulnerable to terrorist attacks. Although it is impossible to design pipelines to withstand any conceivable damage due to external (terrorist attacks, seismic effects) and internal effects (design and manufacturing defects), it is possible to improve the performance of pipelines. By understanding the design criteria, it saves lots of money and more over human lives and also protects the product in pipelines, which cannot be recovered and which is more and more scares day by day. This research aims: 1) to understand the different types of pipeline damages, reasons for their occurrence and their effects on the pipelines, such as mechanical damages, material defects, cracks, manufacturing defects, 2) to understand the explosions in pipelines, internal or external explosions and seismic distress, 3) to do research and literature review in analytical and numerical methods which allow researching the influence of shock waves (explosions, seismic), 4) to develop description of experimental research of pipelines subjected to shock waves (explosions, seismic), 5) to establish an effective methodology (develop mathematical model) to study the risk management in pipeline exploitation which can be subjected to such conditions like shock waves (caused by explosions, seismic, as well as mining activities) on pipeline systems (buried, on surface, or underwater), and 6) to establish criteria for risk management. This paper includes a review of the related literature covering the first two goals.

In shock absorbers damper-rod force not only depends on damper-rod velocity, but also on position and acceleration. Since hydraulic losses are responsible for velocity-dependent forces, other phenomena are responsible for the dependence of force on position and acceleration, they are: compliances of the chambers and of the seals, compressibility of oil and gas and inertia of oil. The presence of position and/or acceleration-dependent terms in the force causes a hysteresis loop in the force-velocity diagram and a delay between force and velocity in the force-time diagram, which affect the performance of the shock absorber. Usually test benches measure only the damper-rod force, hence, it is difficult to recognize the physical phenomena that generate the hysteresis loop. This paper deals with a research program in which a high performance motorcycle shock absorber was tested by means of a specific test bench which includes the measurement of pressures inside the cambers during harmonic tests (frequency range 1–7 Hz). The experimental results with proper mathematical models made it possible to analyze the hysteresis loops of the pressures in the various chambers and the generation of the hysteresis loop and time delay of damper-rod force. First some experimental results dealing with pressures inside compression, rebound and compensation chambers are shown. Then a simplified mathematical model is presented, it is able to capture the most relevant physical phenomena that generate the hysteresis loop of the total force. Finally a complete model of the shock absorber is described, it takes into account details of oil motion inside the valves and it is able to predict the behavior of the shock absorber for a wide range of working conditions. Some numerical results obtained with the complete model are presented and compared with experimental results.

Oil drives the entire world economy, and it is entirely a geostrategy issue. The strong development of the economy over the past few decades has provided a global stage for those countries that have a stable political establishment while managing enormous amounts of oil. Now, year after year, it is becoming increasingly clear that the importance of oil and gas is falling away, and it is those energy sources that bring about a reduction in the half-life that comes into the scene. Oil and gas are non-renewable energy sources and as such are naturally limited, therefore their reserve will become economically unprofitable in the future, and exploitation will reach its natural end. The aim of this research paper is divided into two structures: the first thesis concerns giving a fresh insight into the state of the oil market from the beginning of the pandemic to the present day. The issue of geopolitical relations between Riyadh and Moscow is to be addressed here and how much of a negative consequence the price war has left on their fiscal calculations, although geopolitical friction has deepened the shock further into financial markets. Thus, the fiscal calculation of both countries suffered revenue shocks, but it also prompted an even deeper decline in stock indexes and temporary stagflation of the global economy. The second thesis refers to a brief review of the analysis of the long-term future of non-renewable and renewable energy sources. The future of cleaner forms of energy is imperative, but also a challenging task, as this means shifting the entire structure of national economies to green and renewable. The focus is on giving insight into why this is a necessity, but also why there could be a dangerous precedent and negative cash flows in some structures of the economy. Currently, and any future planning and fulfillment of climate guidelines, must not lead to an increase in energy poverty and consequently a decrease in living standards, because in all geopolitical games the line is always drawn between rich and poor countries, that is, advanced economies and developing economies. Therefore, the long-term and global leaders in green and renewable energy sources will be those countries that successfully implement public interests in these projects, because only in this way can the goal be met – shifting a certain structure of the economy to cleaner sources while satisfying social utility and increasing employment.

Abstract Supersonic gas injection can help deliver gas uniformly to a reservoir, regardless of reservoir conditions. This technology has played a key role in enhanced oil recovery (EOR) and in particular, thermal enhanced oil recovery operations. Most previous studies have focused on single phase gas injection whereas in most field applications, multiphase and multicomponent situations occur. In the research documented in this paper, we report on results of evaluations of compressible multiphase supersonic gas flows in which gas is the continuous phase is seeded with dispersed liquid droplets or solid particles. Theoretical derivation and numerical simulations with and without relative motions between continuous and disperse phases are examined first. The results illustrate that the shock wave structures and flow properties associated with the multiphase gas flows are different than that of single-phase isentropic flows. The existence and importance of relaxation zones after the normal shock wave in multiphase flow is described. Numerical computational fluid dynamics (CFD) simulations are conducted to show how the multiphase multicomponent flow affects gas phase injection under different conditions. The impact of solid/liquid mass loading on flow performance is discussed. Finally, the practical application of the findings is discussed.

Abstract Binary mixture thermo-chemical (BiMTheCh) technology refers to energy-releasing chemicals which can be injected into the reservoir with in-situ generation of heat, nitrogen and carbon dioxide. As laboratory investigations show, BiMTheCh or thermochemical fluid has proved to be a highly effective technology for stimulation of oil wells with heavy oil and low permeability. In this work, the feasibility of this technology for stimulation of brown fields from laboratory to field scale is investigated. First, on the laboratory scale, thermobaric parameters of the reaction were studied to optimize the composition of injecting chemicals. And finally, the optimized composition is applied to enhance oil recovery from low permeable reservoirs in Russia. Laboratory results show that BiMTheCh can be used for removing asphaltene and resin from near borehole zone by melting them. Generated gases after the reaction create a network of fractures in the vicinity of the reaction zone and simultaneously, by inducing a thermobaric shock, cracks oil molecules and upgrades oil directly into the reservoir. Oil field data in 5 wells shows that oil production increased 2-3 folds with a duration of 12 months or more. BiMTheCh can be used for stimulation of green and brown fields with a high efficiency in a safe rig-less mode.

Abstract Offshore floating nuclear power plant (FNPP) is characterized by its small and mobility, which is not only able to provide safe and efficient electric energy to remote islands, but to the oil and gas platforms. The safety digital control system (DCS) cabinet, as a carrier for the electronic devices, plays a significant role in ensuring the normal operation of the nuclear power plant. To satisfy the requirements of cabinet used in the sea environment, such as well rigidity, shock load resistance, good seal and corrosion resistance, etc, more and more attention is focused on the cast aluminum cabinet. However, the cast aluminum structure may cause larger weight of cabinet, which inevitability affects the mobility of cabinet, and increases the carried load of ship as well. Therefore, seeking for an effective approach to design a light weight cast aluminum cabinet for the offshore FNPP is definitely necessary. In this work, a frame of cast aluminum cabinet with lightweight is obtained successfully via structure topology optimization design, it is found that the weight of the frame can be reduced to 50% after optimization iterations. Subsequently, the natural frequency of the optimized cast aluminum cabinet is calculated by using ABAQUS, it is seen that the first mode frequency of the frame is beyond 30 Hz, which can meet the basic stiffness requirement. Accordingly, dynamic design analysis method (DDAM) is performed to verify the ability of the optimized cast aluminum cabinet in resisting sudden shock load, and the shock response characteristics of the cabinet are determined. Numerical results support that the optimized frame of cabinet possesses good resistance to high level shock. However, for the assembled cast aluminum cabinet, the vertical shock circumstance turns out to be the most critical condition, high stress and deformation regions occurs at the bracket and column. Reinforcements are proposed to make the bracket stiffer in this shock loading condition.

Abstract Although the pandemic has slowed the entire world for some years, the energy demand is nonetheless set to increase significantly in the coming years, mainly driven by the expectation of an increase in prosperity in the developing world. Renewable energy is expected to play a major role as the main source of energy. Nevertheless, oil and gas production is supposed to remain a key player in the energy scenario with natural gas consumption constantly increasing and oil consumption peaking in 2030. Lately, the world has found itself in the midst of its first global energy crisis - a shock of unprecedented breadth and complexity triggered by Russia's invasion of Ukraine following rapid economic recovery from the pandemic. This uncertain scenario caused oil and especially gas prices to skyrocket in 2022, reaching levels never seen before and characterizing the whole year as a year of record profits for most of the oil and gas players across the globe. This, in turn, caused a oil and gas upstream capital expenditures increased by 39% in 2022, the highest level since 2014. However, estimates say that additional investment are still needed to ensure adequate supplies in the future, investments that are still uncertain to be granted at the horizon.

The Venezuelan experience in the 1980s is a particularly fertile ground for the analysis of negative shocks. Two large shocks took place under very different control regimes, thus highlighting the role the institutional setting plays in determining the response. Moreover, the experience can shed a different light into the convenience of alternative exchange rate regimes for countries subject to large and frequent trade shocks. In addition, the analysis can be simplified for two reasons. First, oil shocks only have direct effects on the public sector, thus implying that it is the policy reaction to the shock that will affect households and firms. Secondly, the supply response of the oil industry is not of macroeconomic interest.

Energy revenues represent roughly 45 percent of Trinidad and Tobago's GDP and are highly volatile since they are correlated with the price of oil and gas. Hence, sharp changes in energy prices, whether temporary or sustained, can have important consequences for economic growth and overall macroeconomic performance. After the 2014 crash in oil prices, a key challenge that emerged for policymakers in hydrocarbon-exporting countries is how to manage fiscal retrenchment in an environment of subdued growth. Using structural vector autoregression, this article examines three questions related to this challenge by focusing on Trinidad and Tobago: (1) what is the asymmetric effect of energy revenue shocks on macroeconomic performance, (2) what is the asymmetric effect of energy revenue shocks on government expenditure (disaggregated by categories), and (3) what is the effect of government expenditure shocks (disaggregated by categories) on economic growth. The results suggest that although positive energy revenue shock increases growth almost immediately, it is not sustained. A negative energy revenue shock is found to have a greater adverse effect on primary expenditure than a positive shock and this largely occurs through a reduction in capital expenditure. Transfers and subsidies, and goods and services are the most sensitive components of current expenditure to positive energy shocks. With respect to the effect of expenditure on growth, transfers and subsidies significantly reduce growth in the short run, whereas other categories of expenditure are found to have a largely positive effect on growth. These findings suggest three important implications for policymakers: the first is to reduce and or reorient public expenditure away from transfers and subsidies and towards more growth-enhancing areas; the second is the need for clear fiscal rules, and to more effectively balance the role of fiscal policy as a growth stimulus while also performing other social functions; and thirdly, these results bring into sharp focus the effectiveness of the rules of the country's stabilization fund to manage windfall energy revenues.

In the first eight decades of the 20th century, Brazil ranked among the countries with highest growth rates in the world. During the period 1930-80, in particular, it managed to reduce its per capita income gap vis-à-vis industrialized economies and seemed poised to escape underdevelopment early in this century. However, this dream never materialized; Brazil's growth performance deteriorated sharply over the following quarter century, never fully recovering from the second oil shock and the foreign debt crisis. In this period Brazil experienced much lower and more volatile growth, with its long-term annual growth rate (ten-year moving average) fluctuating in the 2% to 3% range, well below the 6% to 10% range that prevailed in 1950-80. Brazil reacted by embarking on reforms, from trade liberalization to changes in fiscal and social policies. Policies improved, especially after price stabilization, in 1994, and, if anything, have been better than through most the high growth period, but apparently to no avail. Something happened in this later period that prevented Brazil from regaining the rapid growth that it had exhibited previously. What might it have been?

Diversification of the economy, including exports, is a core goal of Saudi Vision 2030 (SV2030). The petrochemical sector can considerably contribute to the Kingdom’s diversification strategy, as it holds a substantial share in non-oil exports. First, this study econometrically estimated how exports of chemicals and rubber-plastics were shaped by theoretically articulated domestic and foreign factors over the 1993-2020 period. Then, the estimated export equations were integrated into a general equilibrium model, called the King Abdullah Petroleum Studies and Research Center (KAPSARC) Global Energy Macroeconometric Model (KGEMM), and a scenario analysis was conducted for the diversification implications of foreign and domestic price shocks until 2035.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.

In the face of the multiple shocks currently experienced by the domestic economy (resulting from the drop in oil prices and the appearance of a global pandemic), the Colombian financial system is in a position of sound solvency and adequate liquidity. At the same time, credit quality has been recovering and the exposure of credit institutions to firms with currency mismatches has declined relative to previous episodes of sudden drops in oil prices. These trends are reflected in the recent fading of red and blue tonalities in the performance and credit risk segments of the risk heatmaps in Graphs A and B.1 Naturally, the sudden, unanticipated change in macroeconomic conditions has caused the appearance of vulnerabilities for short-term financial stability. These vulnerabilities require close and continuous monitoring on the part of economic authorities. The main vulnerability is the response of credit and credit risk to a potential, temporarily extreme macroeconomic situation in the context of: (i) recently increased exposure of some banks to household sector, and (ii) reductions in net interest income that have led to a decline in the profitability of the banking business in the recent past. Furthermore, as a consequence of greater uncertainty and risk aversion, occasional problems may arise in the distribution of liquidity between agents and financial markets. With regards to local markets, spikes have been registered in the volatility of public and private fixed income securities in recent weeks that are consistent with the behavior of the international markets and have had a significant impact on the liquidity of those instruments (red portions in the most recent past of some market risk items on the map in Graph A). In order to adopt a forward-looking approach to those vulnerabilities, this Report presents a stress test that evaluates the resilience of credit institutions in the event of a hypothetical scenario thatseeks to simulate an extreme version of current macroeconomic conditions. The scenario assumes a hypothetical negative growth that is temporarily strong but recovers going into the middle of the coming year and has extreme effects on credit quality. The results suggest that credit institutions have the ability to withstand a significant deterioration in economic conditions in the short term. Even though there could be a strong impact on credit, liquidity, and profitability under the scenario being considered, aggregate capital ratios would probably remain at above their regulatory limits over the horizon of a year. In this context, the recent measures taken by both Banco de la República and the Office of the Financial Superintendent of Colombia that are intended to help preserve the financial stability of the Colombian economy become highly relevant. In compliance with its constitutional objectives and in coordination with the financial system’s security network, Banco de la República will continue to closely monitor the outlook for financial stability at this juncture and will make the decisions that are necessary to ensure the proper functioning of the economy, facilitate the flow of sufficient credit and liquidity resources, and further the smooth functioning of the payment system. Juan José Echavarría Governor

Macroeconomic summary Annual inflation continued to rise in the first quarter (8.5%) and again outpaced both market expectations and the technical staff’s projections. Inflation in major consumer price index (CPI) baskets has accelerated year-to-date, rising in March at an annual rate above 3%. Food prices (25.4%) continued to contribute most to rising inflation, mainly affected by a deterioration in external supply and rising costs of agricultural inputs. Increases in transportation prices and in some utility rates (energy and gas) can explain the acceleration in regulated items prices (8.3%). For its part, the increase in inflation excluding food and regulated items (4.5%) would be the result of shocks in supply and external costs that have been more persistent than expected, the effects of indexation, accumulated inflationary pressures from the exchange rate, and a faster-than-anticipated tightening of excess productive capacity. Within the basket excluding food and regulated items, external inflationary pressures have meaningfully impacted on goods prices (6.4%), which have been accelerating since the last quarter of 2021. Annual growth in services prices (3.8%) above the target rate is due primarily to food away from home (14.1%), which was affected by significant increases in food and utilities prices and by a rise in the legal monthly minimum wage. Housing rentals and other services prices also increased, though at rates below 3%. Forecast and expected inflation have increased and remain above the target rate, partly due to external pressures (prices and costs) that have been more persistent than projected in the January report (Graphs 1.1 and 1.2). Russia’s invasion of Ukraine accentuated inflationary pressures, particularly on international prices for certain agricultural goods and inputs, energy, and oil. The current inflation projection assumes international food prices will increase through the middle of this year, then remain high and relatively stable for the remainder of 2022. Recovery in the perishable food supply is forecast to be less dynamic than previously anticipated due to high agricultural input prices. Oil prices should begin to recede starting in the second half of the year, but from higher levels than those presented in the previous report. Given the above, higher forecast inflation could accentuate indexation effects and increase inflation expectations. The reversion of a rebate on value-added tax (VAT) applied to cleaning and hygiene products, alongside the end of Colombia’s COVID-19 health emergency, could increase the prices of those goods. The elimination of excess productive capacity on the forecast horizon, with an output gap close to zero and somewhat higher than projected in January, is another factor to consider. As a consequence, annual inflation is expected to remain at high levels through June. Inflation should then decline, though at a slower pace than projected in the previous report. The adjustment process of the monetary policy rate wouldcontribute to pushing inflation and its expectations toward the target on the forecast horizon. Year-end inflation for 2022 is expected to be around 7.1%, declining to 4.8% in 2023. Economic activity again outperformed expectations. The technical staff’s growth forecast for 2022 has been revised upward from 4.3% to 5% (Graph 1.3). Output increased more than expected in annual terms in the fourth quarter of 2021 (10.7%), driven by domestic demand that came primarily because of private consumption above pre-pandemic levels. Investment also registered a significant recovery without returning to 2019 levels and with mixed performance by component. The trade deficit increased, with significant growth in imports similar to that for exports. The economic tracking indicator (ISE) for January and February suggested that firstquarter output would be higher than previously expected and that the positive demand shock observed at the end of 2021 could be fading slower than anticipated. Imports in consumer goods, retail sales figures, real restaurant and hotel income, and credit card purchases suggest that household spending continues to be dynamic, with levels similar to those registered at the end of 2021. Project launch and housing starts figures and capital goods import data suggest that investment also continues to recover but would remain below pre-pandemic levels. Consumption growth is expected to decelerate over the year from high levels reached over the last two quarters. This would come amid tighter domestic and external financial conditions, the exhaustion of suppressed demand, and a deterioration of available household income due to increased inflation. Investment is expected to continue to recover, while the trade deficit should tighten alongside high oil and other export commodity prices. Given all of the above, first-quarter economic growth is now expected to be 7.2% (previously 5.2%) and 5.0% for 2022 as a whole (previously 4.3%). Output growth would continue to moderate in 2023 (2.9%, previously 3.1%), converging similar to long-term rates. The technical staff’s revised projections suggest that the output gap would remain at levels close to zero on the forecast horizon but be tighter than forecast in January (Graph 1.4). These estimates continue to be affected by significant uncertainty associated with geopolitical tensions, external financial conditions, Colombia’s electoral cycle, and the COVID-19 pandemic. External demand is now projected to grow at a slower pace than previously expected amid increased global inflationary pressures, high oil prices, and tighter international financial conditions than forecast in January. The Russian invasion of Ukraine and its inflationary effects on prices for oil and certain agricultural goods and inputs accentuated existing global inflationary pressures originating in supply restrictions and increased international costs. A decline in the supply of Russian oil, low inventory levels, and continued production limits on behalf of the Organization of Petroleum Exporting Countries and its allies (OPEC+) can explain increased projected oil prices for 2022 (USD 100.8/barrel, previously USD 75.3) and 2023 (USD 86.8/barrel, previously USD 71.2). The forecast trajectory for the U.S. Federal Reserve (Fed) interest rate has increased for this and next year to reflect higher real and expected inflation and positive performance in the labormarket and economic activity. The normalization of monetary policy in various developed and emerging market economies, more persistent supply and cost shocks, and outbreaks of COVID-19 in some Asian countries contributed to a reduction in the average growth outlook for Colombia’s trade partners for 2022 (2.8%, previously 3.3%) and 2023 (2.4%, previously 2.6%). In this context, the projected path for Colombia’s risk premium increased, partly due to increased geopolitical global tensions, less expansionary monetary policy in the United States, an increase in perceived risk for emerging markets, and domestic factors such as accumulated macroeconomic imbalances and political uncertainty. Given all the above, external financial conditions are tighter than projected in January report. External forecasts and their impact on Colombia’s macroeconomic scenario continue to be affected by considerable uncertainty, given the unpredictability of both the conflict between Russia and Ukraine and the pandemic. The current macroeconomic scenario, characterized by high real inflation levels, forecast and expected inflation above 3%, and an output gap close to zero, suggests an increased risk of inflation expectations becoming unanchored. This scenario offers very limited space for expansionary monetary policy. Domestic demand has been more dynamic than projected in the January report and excess productive capacity would have tightened more quickly than anticipated. Headline and core inflation rose above expectations, reflecting more persistent and important external shocks on supply and costs. The Russian invasion of Ukraine accentuated supply restrictions and pressures on international costs. This partly explains the increase in the inflation forecast trajectory to levels above the target in the next two years. Inflation expectations increased again and are above 3%. All of this increased the risk of inflation expectations becoming unanchored and could generate indexation effects that move inflation still further from the target rate. This macroeconomic context also implies reduced space for expansionary monetary policy. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) continues to adjust its monetary policy. In its meetings both in March and April of 2022, it decided by majority to increase the monetary policy rate by 100 basis points, bringing it to 6.0% (Graph 1.5).

In the second quarter, annual inflation (9.67%), the technical staff’s projections and its expectations continued to increase, remaining above the target. International cost shocks, accentuated by Russia's invasion of Ukraine, have been more persistent than projected, thus contributing to higher inflation. The effects of indexation, higher than estimated excess demand, a tighter labor market, inflation expectations that continue to rise and currently exceed 3%, and the exchange rate pressures add to those described above. High core inflation measures as well as in the producer price index (PPI) across all baskets confirm a significant spread in price increases. Compared to estimates presented in April, the new forecast trajectory for headline and core inflation increased. This was partly the result of greater exchange rate pressure on prices, and a larger output gap, which is expected to remain positive for the remainder of 2022 and which is estimated to close towards yearend 2023. In addition, these trends take into account higher inflation rate indexation, more persistent above-target inflation expectations, a quickening of domestic fuel price increases due to the correction of lags versus the parity price and higher international oil price forecasts. The forecast supposes a good domestic supply of perishable foods, although it also considers that international prices of processed foods will remain high. In terms of the goods sub-basket, the end of the national health emergency implies a reversal of the value-added tax (VAT) refund applied to health and personal hygiene products, resulting in increases in the prices of these goods. Alternatively, the monetary policy adjustment process and the moderation of external shocks would help inflation and its expectations to begin to decrease over time and resume their alignment with the target. Thus, the new projection suggests that inflation could remain high for the second half of 2022, closing at 9.7%. However, it would begin to fall during 2023, closing the year at 5.7%. These forecasts are subject to significant uncertainty, especially regarding the future behavior of external cost shocks, the degree of indexation of nominal contracts and decisions made regarding the domestic price of fuels. Economic activity continues to outperform expectations, and the technical staff’s growth projections for 2022 have been revised upwards from 5% to 6.9%. The new forecasts suggest higher output levels that would continue to exceed the economy’s productive capacity for the remainder of 2022. Economic growth during the first quarter was above that estimated in April, while economic activity indicators for the second quarter suggest that the GDP could be expected to remain high, potentially above that of the first quarter. Domestic demand is expected to maintain a positive dynamic, in particular, due to the household consumption quarterly growth, as suggested by vehicle registrations, retail sales, credit card purchases and consumer loan disbursement figures. A slowdown in the machinery and equipment imports from the levels observed in March contrasts with the positive performance of sales and housing construction licenses, which indicates an investment level similar to that registered for the first three months of the year. International trade data suggests the trade deficit would be reduced as a consequence of import levels that would be lesser than those observed in the first quarter, and stable export levels. For the remainder of the year and 2023, a deceleration in consumption is expected from the high levels seen during the first half of the year, partially as a result of lower repressed demand, tighter domestic financial conditions and household available income deterioration due to increased inflation. Investment is expected to continue its slow recovery while remaining below pre-pandemic levels. The trade deficit is expected to tighten due to projected lower domestic demand dynamics, and high prices of oil and other basic goods exported by the country. Given the above, economic growth in the second quarter of 2022 would be 11.5%, and for 2022 and 2023 an annual growth of 6.9% and 1.1% is expected, respectively. Currently, and for the remainder of 2022, the output gap would be positive and greater than that estimated in April, and prices would be affected by demand pressures. These projections continue to be affected by significant uncertainty associated with global political tensions, the expected adjustment of monetary policy in developed countries, external demand behavior, changes in country risk outlook, and the future developments in domestic fiscal policy, among others. The high inflation levels and respective expectations, which exceed the target of the world's main central banks, largely explain the observed and anticipated increase in their monetary policy interest rates. This environment has tempered the growth forecast for external demand. Disruptions in value chains, rising international food and energy prices, and expansionary monetary and fiscal policies have contributed to the rise in inflation and above-target expectations seen by several of Colombia’s main trading partners. These cost and price shocks, heightened by the effects of Russia's invasion of Ukraine, have been more prevalent than expected and have taken place within a set of output and employment recovery, variables that in some countries currently equal or exceed their projected long-term levels. In response, the U.S. Federal Reserve accelerated the pace of the benchmark interest rate increase and rapidly reduced liquidity levels in the money market. Financial market actors expect this behavior to continue and, consequently, significantly increase their expectations of the average path of the Fed's benchmark interest rate. In this setting, the U.S. dollar appreciated versus the peso in the second quarter and emerging market risk measures increased, a behavior that intensified for Colombia. Given the aforementioned, for the remainder of 2022 and 2023, the Bank's technical staff increased the forecast trajectory for the Fed's interest rate and reduced the country's external demand growth forecast. The projected oil price was revised upward over the forecast horizon, specifically due to greater supply restrictions and the interruption of hydrocarbon trade between the European Union and Russia. Global geopolitical tensions, a tightening of monetary policy in developed economies, the increase in risk perception for emerging markets and the macroeconomic imbalances in the country explain the increase in the projected trajectory of the risk premium, its trend level and the neutral real interest rate1. Uncertainty about external forecasts and their consequent impact on the country's macroeconomic scenario remains high, given the unpredictable evolution of the conflict between Russia and Ukraine, geopolitical tensions, the degree of the global economic slowdown and the effect the response to recent outbreaks of the pandemic in some Asian countries may have on the world economy. This macroeconomic scenario that includes high inflation, inflation forecasts, and expectations above 3% and a positive output gap suggests the need for a contractionary monetary policy that mitigates the risk of the persistent unanchoring of inflation expectations. In contrast to the forecasts of the April report, the increase in the risk premium trend implies a higher neutral real interest rate and a greater prevailing monetary stimulus than previously estimated. For its part, domestic demand has been more dynamic, with a higher observed and expected output level that exceeds the economy’s productive capacity. The surprising accelerations in the headline and core inflation reflect stronger and more persistent external shocks, which, in combination with the strength of aggregate demand, indexation, higher inflation expectations and exchange rate pressures, explain the upward projected inflation trajectory at levels that exceed the target over the next two years. This is corroborated by the inflation expectations of economic analysts and those derived from the public debt market, which continued to climb and currently exceed 3%. All of the above increase the risk of unanchoring inflation expectations and could generate widespread indexation processes that may push inflation away from the target for longer. This new macroeconomic scenario suggests that the interest rate adjustment should continue towards a contractionary monetary policy landscape. 1.2. Monetary policy decision Banco de la República’s Board of Directors (BDBR), at its meetings in June and July 2022, decided to continue adjusting its monetary policy. At its June meeting, the BDBR decided to increase the monetary policy rate by 150 basis points (b.p.) and its July meeting by majority vote, on a 150 b.p. increase thereof at its July meeting. Consequently, the monetary policy interest rate currently stands at 9.0% . 1 The neutral real interest rate refers to the real interest rate level that is neither stimulative nor contractionary for aggregate demand and, therefore, does not generate pressures that lead to the close of the output gap. In a small, open economy like Colombia, this rate depends on the external neutral real interest rate, medium-term components of the country risk premium, and expected depreciation. Box 1: A Weekly Indicator of Economic Activity for Colombia Juan Pablo Cote Carlos Daniel Rojas Nicol Rodriguez Box 2: Common Inflationary Trends in Colombia Carlos D. Rojas-Martínez Nicolás Martínez-Cortés Franky Juliano Galeano-Ramírez Box 3: Shock Decomposition of 2021 Forecast Errors Nicolás Moreno Arias

The Colombian financial system has not suffered major structural disruptions during these months of deep economic contraction and has continued to carry out its basic functions as usual, thus facilitating the economy's response to extreme conditions. This is the result of the soundness of financial institutions at the beginning of the crisis, which was reflected in high liquidity and capital adequacy indicators as well as in the timely response of various authorities. Banco de la República lowered its policy interest rates 250 points to 1.75%, the lowest level since the creation of the new independent bank in 1991, and provided ample temporary and permanent liquidity in both pesos and foreign currency. The Office of the Financial Superintendent of Colombia, in turn, adopted prudential measures to facilitate changes in the conditions for loans in effect and temporary rules for rating and loan-loss provisions. Finally, the national government expanded the transfers as well as the guaranteed credit programs for the economy. The supply of real credit (i.e. discounting inflation) in the economy is 4% higher today than it was 12 months ago with especially marked growth in the housing (5.6%) and commercial (4.7%) loan portfolios (2.3% in consumer and -0.1% in microloans), but there have been significant changes over time. During the first few months of the quarantine, firms increased their demands for liquidity sharply while consumers reduced theirs. Since then, the growth of credit to firms has tended to slow down, while consumer and housing credit has grown. The financial system has responded satisfactorily to the changes in the respective demands of each group or sector and loans may grow at high rates in 2021 if GDP grows at rates close to 4.6% as the technical staff at the Bank expects; but the forecasts are highly uncertain. After the strict quarantine implemented by authorities in Colombia, the turmoil seen in March and early April, which was evident in the sudden reddening of macroeconomic variables on the risk heatmap in Graph A,[1] and the drop in crude oil and coal prices (note the high volatility registered in market risk for the region on Graph A) the local financial markets stabilized relatively quickly. Banco de la República’s credible and sustained policy response played a decisive role in this stabilization in terms of liquidity provision through a sharp expansion of repo operations (and changes in amounts, terms, counterparties, and eligible instruments), the purchases of public and private debt, and the reduction in bank reserve requirements. In this respect, there is now abundant aggregate liquidity and significant improvements in the liquidity position of investment funds. In this context, the main vulnerability factor for financial stability in the short term is still the high degree of uncertainty surrounding loan quality. First, the future trajectory of the number of people infected and deceased by the virus and the possible need for additional health measures is uncertain. For that reason, there is also uncertainty about the path for economic recovery in the short and medium term. Second, the degree to which the current shock will be reflected in loan quality once the risk materializes in banks’ financial statements is uncertain. For the time being, the credit risk heatmap (Graph B) indicates that non-performing and risky loans have not shown major deterioration, but past experience indicates that periods of sharp economic slowdown eventually tend to coincide with rises in non-performing loans: the calculations included in this report suggest that the impact of the recession on credit quality could be significant in the short term. This is particularly worrying since the profitability of credit establishments has been declining in recent months, and this could affect their ability to provide credit to the real sector of the economy. In order to adopt a forward-looking approach to this vulnerability, this Report presents several stress tests that evaluate the resilience of the liquidity and capital adequacy of credit institutions and investment funds in the event of a hypothetical scenario that seeks to simulate an extreme version of current macroeconomic conditions. The results suggest that even though there could be strong impacts on the credit institutions’ volume of credit and profitability under such scenarios, aggregate indicators of total and core capital adequacy will probably remain at levels that are above the regulatory limits over the horizon of a year. At the same time, the exercises highlight the high capacity of the system's liquidity to face adverse scenarios. In compliance with its constitutional objectives and in coordination with the financial system's security network, Banco de la República will continue to closely monitor the outlook for financial stability at this juncture and will make the decisions that are necessary to ensure the proper functioning of the economy, facilitate the flow of sufficient credit and liquidity resources, and further the smooth operation of the payment systems. Juan José Echavarría Governor

Macroeconomic summary Several factors contributed to an increase in projected inflation on the forecast horizon, keeping it above the target rate. These included inflation in December that surpassed expectations (5.62%), indexation to higher inflation rates for various baskets in the consumer price index (CPI), a significant real increase in the legal minimum wage, persistent external and domestic inflationary supply shocks, and heightened exchange rate pressures. The CPI for foods was affected by the persistence of external and domestic supply shocks and was the most significant contributor to unexpectedly high inflation in the fourth quarter. Price adjustments for fuels and certain utilities can explain the acceleration in inflation for regulated items, which was more significant than anticipated. Prices in the CPI for goods excluding food and regulated items also rose more than expected. This was partly due to a smaller effect on prices from the national government’s VAT-free day than anticipated by the technical staff and more persistent external pressures, including via peso depreciation. By contrast, the CPI for services excluding food and regulated items accelerated less than expected, partly reflecting strong competition in the communications sector. This was the only major CPI basket for which prices increased below the target inflation rate. The technical staff revised its inflation forecast upward in response to certain external shocks (prices, costs, and depreciation) and domestic shocks (e.g., on meat products) that were stronger and more persistent than anticipated in the previous report. Observed inflation and a real increase in the legal minimum wage also exceeded expectations, which would boost inflation by affecting price indexation, labor costs, and inflation expectations. The technical staff now expects year-end headline inflation of 4.3% in 2022 and 3.4% in 2023; core inflation is projected to be 4.5% and 3.6%, respectively. These forecasts consider the lapse of certain price relief measures associated with the COVID-19 health emergency, which would contribute to temporarily keeping inflation above the target on the forecast horizon. It is important to note that these estimates continue to contain a significant degree of uncertainty, mainly related to the development of external and domestic supply shocks and their ultimate effects on prices. Other contributing factors include high price volatility and measurement uncertainty related to the extension of Colombia’s health emergency and tax relief measures (such as the VAT-free days) associated with the Social Investment Law (Ley de Inversión Social). The as-yet uncertain magnitude of the effects of a recent real increase in the legal minimum wage (that was high by historical standards) and high observed and expected inflation, are additional factors weighing on the overall uncertainty of the estimates in this report. The size of excess productive capacity remaining in the economy and the degree to which it is closing are also uncertain, as the evolution of the pandemic continues to represent a significant forecast risk. margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. The technical staff revised its GDP growth projection for 2022 from 4.7% to 4.3% (Graph 1.3). This revision accounts for the likelihood that a larger portion of the recent positive dynamic in private consumption would be transitory than previously expected. This estimate also contemplates less dynamic investment behavior than forecast in the previous report amid less favorable financial conditions and a highly uncertain investment environment. Third-quarter GDP growth (12.9%), which was similar to projections from the October report, and the fourth-quarter growth forecast (8.7%) reflect a positive consumption trend, which has been revised upward. This dynamic has been driven by both public and private spending. Investment growth, meanwhile, has been weaker than forecast. Available fourth-quarter data suggest that consumption spending for the period would have exceeded estimates from October, thanks to three consecutive months that included VAT-free days, a relatively low COVID-19 caseload, and mobility indicators similar to their pre-pandemic levels. By contrast, the most recently available figures on new housing developments and machinery and equipment imports suggest that investment, while continuing to rise, is growing at a slower rate than anticipated in the previous report. The trade deficit is expected to have widened, as imports would have grown at a high level and outpaced exports. Given the above, the technical staff now expects fourth-quarter economic growth of 8.7%, with overall growth for 2021 of 9.9%. Several factors should continue to contribute to output recovery in 2022, though some of these may be less significant than previously forecast. International financial conditions are expected to be less favorable, though external demand should continue to recover and terms of trade continue to increase amid higher projected oil prices. Lower unemployment rates and subsequent positive effects on household income, despite increased inflation, would also boost output recovery, as would progress in the national vaccination campaign. The technical staff expects that the conditions that have favored recent high levels of consumption would be, in large part, transitory. Consumption spending is expected to grow at a slower rate in 2022. Gross fixed capital formation (GFCF) would continue to recover, approaching its pre-pandemic level, though at a slower rate than anticipated in the previous report. This would be due to lower observed GFCF levels and the potential impact of political and fiscal uncertainty. Meanwhile, the policy interest rate would be less expansionary as the process of monetary policy normalization continues. Given the above, growth in 2022 is forecast to decelerate to 4.3% (previously 4.7%). In 2023, that figure (3.1%) is projected to converge to levels closer to the potential growth rate. In this case, excess productive capacity would be expected to tighten at a similar rate as projected in the previous report. The trade deficit would tighten more than previously projected on the forecast horizon, due to expectations of an improved export dynamic and moderation in imports. The growth forecast for 2022 considers a low basis of comparison from the first half of 2021. However, there remain significant downside risks to this forecast. The current projection does not, for example, account for any additional effects on economic activity resulting from further waves of COVID-19. High private consumption levels, which have already surpassed pre-pandemic levels by a large margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. External demand for Colombian goods and services should continue to recover amid significant global inflation pressures, high oil prices, and less favorable international financial conditions than those estimated in October. Economic activity among Colombia’s major trade partners recovered in 2021 amid countries reopening and ample international liquidity. However, that growth has been somewhat restricted by global supply chain disruptions and new outbreaks of COVID-19. The technical staff has revised its growth forecast for Colombia’s main trade partners from 6.3% to 6.9% for 2021, and from 3.4% to 3.3% for 2022; trade partner economies are expected to grow 2.6% in 2023. Colombia’s annual terms of trade increased in 2021, largely on higher oil, coffee, and coal prices. This improvement came despite increased prices for goods and services imports. The expected oil price trajectory has been revised upward, partly to supply restrictions and lagging investment in the sector that would offset reduced growth forecasts in some major economies. Elevated freight and raw materials costs and supply chain disruptions continue to affect global goods production, and have led to increases in global prices. Coupled with the recovery in global demand, this has put upward pressure on external inflation. Several emerging market economies have continued to normalize monetary policy in this context. Meanwhile, in the United States, the Federal Reserve has anticipated an end to its asset buying program. U.S. inflation in December (7.0%) was again surprisingly high and market average inflation forecasts for 2022 have increased. The Fed is expected to increase its policy rate during the first quarter of 2022, with quarterly increases anticipated over the rest of the year. For its part, Colombia’s sovereign risk premium has increased and is forecast to remain on a higher path, to levels above the 15-year-average, on the forecast horizon. This would be partly due to the effects of a less expansionary monetary policy in the United States and the accumulation of macroeconomic imbalances in Colombia. Given the above, international financial conditions are projected to be less favorable than anticipated in the October report. The increase in Colombia’s external financing costs could be more significant if upward pressures on inflation in the United States persist and monetary policy is normalized more quickly than contemplated in this report. As detailed in Section 2.3, uncertainty surrounding international financial conditions continues to be unusually high. Along with other considerations, recent concerns over the potential effects of new COVID-19 variants, the persistence of global supply chain disruptions, energy crises in certain countries, growing geopolitical tensions, and a more significant deceleration in China are all factors underlying this uncertainty. The changing macroeconomic environment toward greater inflation and unanchoring risks on inflation expectations imply a reduction in the space available for monetary policy stimulus. Recovery in domestic demand and a reduction in excess productive capacity have come in line with the technical staff’s expectations from the October report. Some upside risks to inflation have materialized, while medium-term inflation expectations have increased and are above the 3% target. Monetary policy remains expansionary. Significant global inflationary pressures and the unexpected increase in the CPI in December point to more persistent effects from recent supply shocks. Core inflation is trending upward, but remains below the 3% target. Headline and core inflation projections have increased on the forecast horizon and are above the target rate through the end of 2023. Meanwhile, the expected dynamism of domestic demand would be in line with low levels of excess productive capacity. An accumulation of macroeconomic imbalances in Colombia and the increased likelihood of a faster normalization of monetary policy in the United States would put upward pressure on sovereign risk perceptions in a more persistent manner, with implications for the exchange rate and the natural rate of interest. Persistent disruptions to international supply chains, a high real increase in the legal minimum wage, and the indexation of various baskets in the CPI to higher inflation rates could affect price expectations and push inflation above the target more persistently. These factors suggest that the space to maintain monetary stimulus has continued to diminish, though monetary policy remains expansionary. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) in its meetings in December 2021 and January 2022 voted to continue normalizing monetary policy. The BDBR voted by a majority in these two meetings to increase the benchmark interest rate by 50 and 100 basis points, respectively, bringing the policy rate to 4.0%.