Saudi Arabia should introduce sizeable and multi-year fiscal adjustments to address a very large fiscal deficit this year and over the medium term due to a sharp drop in oil revenues and sustained expenditure growth, according to the Washington-based IMF.

Saudi Arabia’s central government fiscal deficit in 2015 is expected to reach 19.5 percent of the GDP, or about $150bn. The IMF says there is a possibility it may decline from this level, but will remain relatively high into 2016 and beyond.

Some of the measures the kingdom must consider adopting include comprehensive energy price reforms, control of the public sector wage bill, greater efficiency in public sector investment, and an expansion of non-oil revenues, including by introducing a value-added tax (VAT) and a land tax, the IMF says in its latest report on the kingdom.

The IMF forecasts that the kingdom’s real GDP growth will slow to 2.8 per cent this year and continue to decelerate in 2016 to 2.4 per cent as the government adjusts its spending to the lower oil price environment. Growth is expected to be about 3 per cent over the medium term, with inflation rates remaining subdued over the same period.

The kingdom’s debt level, however, remains very low at 1.6 per cent of the 2014 GDP. Current account surplus, while declining to 10.9 per cent of GDP in 2014, remains healthy in spite of a potential small deficit by the end of this year, before it returns to surplus between 2016 and 2020.

The Saudi government has recently issued bonds worth $5.3bn, with more debt issues planned in the future, in a bid to bridge the fiscal shortfall.

As well as public infrastructure and welfare spending, Riyadh is currently involved in the Yemeni conflict, heading an Arab military coalition against Iran-backed Houthi fighters.