The International Monetary Fund (IMF) raised its outlook for Saudi Arabia's economic growth this year but also predicted a much bigger state budget deficit after talks with Saudi officials.

The Saudi economy will keep expanding strongly this year, showing little effect from the oil price drop, but growth will slow in 2016 as lower oil revenues hit state spending, the IMF said after annual consultations with Riyadh.

Gross domestic product is projected to grow 3.5 per cent in 2015, unchanged from 2014, the IMF said in a statement late on Monday. That marked an upgrade from last month, when the IMF forecast three per cent growth for Saudi Arabia this year.

"Government spending in 2015 is expected to remain strong, partly due to a number of one-off factors, while oil revenues have declined," IMF mission chief Tim Callen said. Among other things, King Salman announced hefty bonuses for state employees to mark his accession to power in January.

Callen added, however, that growth would slow to 2.7 per cent in 2016 as government spending began to adjust to the lower oil price environment. Over the medium term, growth is expected to be around three per cent, he added.

The IMF also projected that the government would run a fiscal deficit of around 20 per cent of GDP in 2015 - much larger than the 14.2 per cent gap that it had forecast in May, and the biggest deficit since at least 1999, IMF records show.

Government deposits with the Saudi central bank have been dropping in recent months to finance the deficit. The IMF said this was an appropriate policy for the moment but it predicted that ultimately, the government would need to restrain spending and issue debt.

"A sizeable fiscal policy consolidation will be needed over the next few years to put the deficit on a gradual but firm downward path.

"Going forward, the decline in government deposits will slow as the government starts to issue debt to finance the deficit," the IMF added without specifying when debt issues might begin.-Reuters