JEDDAH — Economic growth in Saudi Arabia is set to slow this year and next as the government is set to reduce spending to compensate for lower oil prices, the International Monetary Fund (IMF) said. Saudi Arabia's gross domestic product will grow by 2.8 percent this year and 2.4 percent in 2016, the IMF said in e-mailed statement on Monday at the conclusion of its regular country consultation. That compares to 3.5 percent growth last year. Annual growth may expand to 3 percent in the ‘medium term', it said. The world's largest oil producer turned to the bond market this year for the first time since 2007 after crude prices fell by more than 50 percent. The IMF projects the Kingdom's budget deficit at 19.5 percent of GDP. At the conclusion of the 2015 Article IV Consultation with Saudi Arabia, IMF Executive Board noted that while the Kingdom's deficit will decline in 2016 and beyond as one-off spending ends and large investment projects are completed, it will remain high over the medium-term. Nevertheless, government debt is very low and was 1.6 percent of GDP at end-2014. The current account surplus declined to 10.9 percent of GDP in 2014. It is expected to move into a small deficit in 2015 but return to surplus during 2016-20. Deposit inflows to banks and private credit growth have slowed in recent months. Nonetheless, the banking system is well positioned to weather lower oil prices and the growth slowdown. The IMF directors noted that the sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade. "Against this background, they underscored the need for a gradual, but sizable multi?year fiscal adjustment based on a mix of expenditure and revenue measures. 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 and a land tax. Directors agreed that issuing debt to finance part of the deficit is appropriate and would help promote the development of private capital markets,” the consultation report noted. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.” The government should also introduce value-added and land taxes, the IMF said. Oil makes up about 90 percent of the Kingdom's revenues. Brent crude fell to below $50 per barrel in August after a brief recovery in June. It traded 0.7 percent lower at $48.39 a barrel in London. Saudi Arabia opened its stock market to international investors in June as part of broader plans to diversify the economy away from oil. The benchmark Tadawul All Share Index has dropped more than 20 percent this year. The kingdom sold SR20 billion ($5.3 billion) of bonds to local banks and public institutions in August to cover the deficit. Government debt was equivalent to 1.6 percent of the country's GDP at the end of 2014, the IMF said. The drop in oil revenues combined with a war in Yemen and a boost in domestic spending led the country's net foreign assets to fall for a fifth consecutive month in June. Reserves stood at $664.4 billion, down from $724.5 in January. — SG