DUBAI- Saudi Arabia's economy will shrink by 6.8% this year, the International Monetary Fund (IMF) said on Wednesday, a sharper decline than the 2.3% contraction estimated in April, as low oil prices and the coronavirus pandemic hit the kingdom hard.

In an update of its April World Economic Outlook forecast, the IMF said it now expects a deeper global recession in 2020 and a slower recovery in 2021, as the coronavirus crisis intensifies in many emerging and developing countries.

In Saudi Arabia, the world's largest oil exporter and the Gulf's largest economy, virus containment measures have crippled nascent sectors of the non-oil economy such as tourism and entertainment, and lower oil prices have slashed state revenues.

"The disruptions due to the pandemic, as well as significantly lower disposable income for oil exporters after the dramatic fuel price decline, imply sharp recessions," said the IMF in reference to several oil producing countries.

It projected Saudi Arabia's gross domestic product (GDP) to shrink by 6.8% this year but to bounce back to a 3.1% growth in 2021. In April, the Washington-based international crisis lender had forecast a 2.3% GDP contraction this year and a 2.9% growth in 2021.

In response to the crisis, Riyadh raised $7 billion in the international debt markets and used some $40 billion of foreign reserves to boost the firepower of its sovereign fund PIF, which bought billions of dollars of stakes in overseas companies.

It also ordered the tripling of value-added tax and suspended cost of living allowances for state employees, shocking private sector businesses and ordinary Saudis who were expecting more countercyclical support from the government. 

"Saudi Arabia is taking massive risks with its contractionary fiscal policies and the next year could be brutal," Tarek Fadlallah, chief executive of Nomura Asset Management Middle East, said in a report this week.

"But given the failure of past attempts to restructure the economy, at least this one is bold."

(Reporting by Davide Barbuscia, Editing by William Maclean) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))