The Arab Monetary Fund (AMF) said it will provide a $168 million loan to Yemen to help support reforms in the the country.

Financial aid from abroad, which has been slow to arrive, has become a lifeline for Yemen, where the economy and government finances have been hit hard by a nationwide fight against al Qaeda militants.

The AMF loan, signed by Yemen's finance minister in Saudi Arabia, aims to support Sanaa's economic reform programme throughout 2014 and 2015, the AMF said in a statement.

An agreement was also signed for Yemen to receive the second and final $57 million tranche of a loan agreed in 2013, the Abu Dhabi-based lender said.

The aid brings the total AMF support to the second-poorest Arab nation after Mauritania to $1.2 billion, the fund said.

Sanaa's finances have deteriorated as it fights to protect oil pipelines that finance up to 70 percent of its budget, and the country has been hit by power cuts and long queues at petrol stations.

It has also struggled to pay public sector salaries and finance food and energy imports as its currency reserves shrink, hitting their lowest level since June 2012 in April.

This week, Yemen announced plans to build a $3.5 billion highway linking the southern port city of Aden to Saudi Arabia, one of its biggest ever infrastructure projects. The World Bank and Riyadh will participate in funding the project.

The country is hoping to seal a long-discussed $550 million loan from the International Monetary Fund this year. That may in turn help it to secure more funds from foreign donors as well as help it cover its expenditures.

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