Yemen has a more urgent need for financial aid in 2014 than last year to fund its budget spending as currency reserves shrink and donor aid is slow to arrive, a senior International Monetary Fund official said.

The impoverished Arabian Peninsula nation, which came close to economic collapse after a popular uprising in 2011, received $7.9 billion in aid pledges from foreign donors in 2012.

However, only a third of that aid package has arrived, Masood Ahmed, the IMF's Director for the Middle East and North Africa, told Reuters after a presentation of a regional outlook.

"This year they do have a more urgent need for financing, including the budgetary financing," he said in an interview. "I would not say they face a crisis but certainly their needs are more sharply defined this year."

Yemen's finances have been strained by frequent attacks on oil pipelines blamed by the government on Islamist militants and disgruntled tribesmen. Crude exports provide up to 70 percent of government budget income.

"Last year, they had additional financing that came in. This year, the money that has come in so far has been more on the projects," Ahmed added.

The IMF expects Yemen's budget deficit to shrink to 6.7 percent of gross domestic product (GDP) this year from 7.1 percent in 2013, the biggest gap since 2009.

The second poorest Arab country after Mauritania is hoping to seal a deal on a $550 million loan from the IMF this year, which its planning minister said in December was close.

"GOOD PROGRESS"

Ahmed said that the timing and amount was still a matter of discussions and that the Fund is planning to meet the Yemeni authorities in Jordan in the coming weeks for further talks.

"We are making a good progress. In two weeks we should have more sense," he said.

Yemen's gross foreign currency assets fell to $4.9 billion in March, or 5.3 months of imports, the lowest level since at least August 2012, central bank data show, denting the comfort zone boosted by Saudi Arabia's $1 billion deposit in 2012.

"That's why we are encouraging that the remaining funds that were promised, the disbursements should follow through on the commitments," Ahmed said. "In that sense, if there is some agreement with the IMF it may help some donors to be able to release funding for the budget support."

Saudi Arabia, along with the neighbouring United Arab Emirates and Oman have also supplied Yemen with fuel in the past to cover shortages. The Saudi oil aid has amounted to $2 billion, Ahmed said.

Economic reforms will be a condition of any IMF loan and the Fund has said that one of the measures the Sana'a government was considering was the elimination of costly fuel subsidies.

Accounting for as much as 5 percent of GDP, the subsidies have swallowed funds Yemen badly needs to invest in education, infrastructure and health.

But removing energy subsidies is a politically sensitive issue in the country, where a third of the population of 25 million live on less than $2 a day.

Economic recovery in Yemen has been accelerating since a massive 12.7 percent contraction in 2012. The IMF now forecasts annual growth will quicken to 5.1 percent this year from 4.4 percent in 2013 before receding again to last year's level. - Reuters