Saudi Arabia’s economy is expected to shrink this year as the kingdom continues to tackle tough economic conditions linked to the low oil price, according to the Institute of International Finance (IIF).

In a report released on Thursday, the IIF said the economy of the world’s largest oil exporter would contract 0.4 per cent in 2017 before returning to 2 per cent growth next year.

The forecast follows the kingdom’s first GDP decline since the financial crisis in the first quarter, when its economy shrank 0.5 per cent compared to the previous year.

Read: Saudi GDP falls for first time since financial crisis

Similarly to the International Monetary Fund, which revised its own growth expectations for Saudi Arabia to “close to zero” last month, the institute cited an increase in the Saudi unemployment rate to 12.3 per cent as one reason for its forecast.

Read: IMF lowers Saudi growth forecast to “close to zero”

The IIF stressed that reforms would be needed to create new jobs including efforts to improve the quality of education and training to prepare Saudi citizens for the private sector.

“The skill composition of graduates of the educational system has long been recognised as being out of line with the demands of the market,” according to the report.

Based on its forecast of 2-3 per cent non-oil growth in the kingdom over the next four years, the IIF said there would not be enough new positions to absorb new entrants into the labour market.

On average 200,000 new jobs were created per year between 2010 and 2015, according to the firm.

In recent months, the kingdom has pressed ahead with efforts to create jobs for citizens.

Among the plans announced by the Ministry of Labour are to limit jobs in shops selling female-specific products to Saudi women only and jobs in grocery stores and shopping malls to Saudi nationals.

Read: Saudi pushes ahead with plans to prevent foreigners from working in women’s shops

It will also introduce stricter requirements under its Nitaqat classification system, which categorises firms based on the percentage of Saudis in their workforce, in September.

Read: Saudi halts operations of one million firms for breaching Saudisation laws