Saudi Arabia’s economic growth is expected to slow to 2.8 per cent this year, compared with 3.5 per cent in 2014, as Riyadh faces the challenge of low oil prices, the Washington-based IMF forecasts in its latest report on the kingdom.

Real GDP growth is expected to slow to 2.4 per cent next year as government spending adjusts to reduced oil revenues, the fund says.

Earlier this week, Saudi Finance Minister Ibrahim al-Assaf said the government plans to cut spending and delay some state-funded projects in reaction to low oil prices.

The IMF expects the central government to report a deficit of 19.5 per cent of GDP in 2015, due to the effects of global crude prices dropping by close to 50 per cent from the middle of 2014.

“While the deficit will decline in 2016 as one-off spending ends and large investment projects are completed, it will remain high over the medium term,” the IMF said based on its consultation ending on 29 July.

Government debt is still very low, at 1.6 per cent of GDP at the end of 2014. The current account surplus declined to 10.9 per cent of GDP in 2014 and the IMF expects this to move into a small deficit in 2015, but return to a surplus during 2016-20.

The drop in oil prices has increased the importance of the Saudi government pushing through structural reforms to switch growth and employment of nationals towards the private sector and decrease the kingdom’s reliance on oil revenues.

“[IMF directors have] underscored the need for a gradual, but sizeable, multi-year fiscal adjustment based on a mix of expenditure and revenue measures,” says the IMF.

“These measures should include comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment, and an expansion of non-oil revenues, including by introducing a VAT [value-added tax] and a land tax,” the fund says.

In a separate report, the US’ Fitch Ratings said the slowdown in loan growth at Saudi banks reflects a deteriorating operating environment.

Total sector loans were up 10 per cent in the first half of 2015, compared with 17 per cent in the same period last year. The slowdown reflects pressure on the kingdom’s economy as new lending has been to government and oil-related projects, as well as the retail sector.

Weaker loan growth will put pressure on the overall profitability of Saudi banks, which rely heavily on net interest income to support revenue growth, says Fitch.

“But banks are likely to offset lower lending contributions with further efficiency improvements and, to a smaller extent, stronger income from securities portfolios,” the ratings agency said in a note on 9 September.