Yemen will destabilise its economy if it delays reforms such as cuts to energy subsidies, the International Monetary Fund said in a report released after the government rolled back some fuel price rises in the face of political unrest.

Sanaa's finances have deteriorated rapidly this year as attacks on oil pipelines by tribesmen and militants deprived the state of key revenue. The government's fight against al Qaeda militants and other rebel groups has also drained its budget.

"Delays in implementing reforms, particularly energy subsidy reforms, would destabilise the economy in the short run, and jeopardise the medium-term growth and poverty reduction objectives," the IMF said in the report, which was released on Thursday but dated July 7.

In a bid to fix its finances and end severe fuel shortages, the government earlier this year came up with an ambitious reform plan that featured a reduction of about 50 percent in fuel subsidies.

The IMF agreed in July to provide a $553 million loan to Yemen over the next three years based on the reform pledges, which also included boosting tax revenues and eliminating ghost workers from the public payroll.

Sanaa originally pledged to cut fuel subsidies on Oct. 1; prices of petrol, diesel and kerosene were expected to rise by 50 rials ($0.23) per litre to 175 rials for petrol and 150 rials for the other two categories. Gas cylinder prices were set to increase by 800 rials to 2,000 rials, the IMF report showed.

However, the government moved much earlier and more aggressively than planned, hiking petrol and kerosene prices to 200 rials per litre and diesel to 195 rials - well above the original targets - on July 30 this year.

The July price hike triggered a political backlash in Yemen, where more than half of the 27 million people live in poverty, and contributed to an upsurge in violence. Over 100 people have been killed in clashes in Sanaa between Shi'ite Houthi rebels and army troops this month.

The government responded to the unrest by reversing much of its subsidy cuts. Prices of petrol and diesel are now at 150 rials per litre, meaning petrol is back below the target price which the government communicated to the IMF.

Earlier this week the Houthis signed an agreement with other political parties to form a more inclusive government after rebels advanced on major state institutions in Sanaa; it is unclear whether the new government will be interested in pushing economic reforms.

COSTS

In its report released on Thursday, the IMF did not comment on the partial reversal of the subsidy cuts, or say whether this might affect Yemen's access to the IMF loan. The money is to be disbursed in stages over the next three years with each stage conditional on a review of the country's economic performance. The next review is to be completed in April 2015.

However, the report warned that the costs of postponing the subsidy reform could be high.

"In the absence of reforms, the fiscal deficit would reach 9 percent of GDP (in 2014) and reserves would decline to well below three months of imports," it said.

The government previously calculated that its subsidy cuts would help trim the budget deficit to 5.4 percent of gross domestic product this year and 4.2 percent by 2018, from 6.9 percent in 2013.

The IMF also noted that Yemen's subsidy system had created incentives for smuggling, corruption and inefficient use of fuel by small electricity producers.

The government hopes the IMF loan deal will help it unlock more funds from international donors, which have been slow to arrive. Of some $8 billion pledged for the 2012-2015 period, only a third has been disbursed, the IMF report showed.

Yemen was expected to receive $230 million of additional budget support in 2014 from Saudi Arabia, the World Bank and the United States contingent on the IMF facility, the report showed. The World Bank would provide a further $50 million in 2015.

The country needs some $6.5 billion in 2014-2017 to cover its gross financing requirements, according to the report.

In July, gross foreign currency reserves rose to $5.2 billion, enough to secure five months of imports, despite a sharp fall in oil export receipts.