NAIROBI (Reuters) - Somalia has made progress restoring state institutions and accountability and its administration can now handle more funds directly, the African Union's deputy head of mission to Somalia said.

For nearly two decades, the Horn of Africa nation has had no functional central government and its transitional administration controls only sections of the capital Mogadishu.

Wafula Wamunyinyi, the deputy special representative for the AU Commission for Somalia, said the government received inadequate direct funding, and that there were still some impediments to them getting more aid.

"They were working hard in re-establishing state institutions, coordination and implementation of the plans; they are making progress ... and taking care of the accountability system," he told Reuters in an interview on Wednesday.

"They are now making progress, working some specific budgets for the first time, and that kind of thing shows there is a direction ... Then, donors will release the funds to them eventually."

Wamunyinyi said the mission had received more than half the $213 million donors have pledged to help restore Somalia's security and public services.

International donors agreed last April to provide the money to help Somalia's transitional government and the 5,000 AU troops providing security to the government.

"I think over $120 million ... has been directed to trust funds, and some progress has been made on that," Wamunyinyi said, speaking in his office in the Kenyan capital.

"The pledges have been flowing until now, I am sure we have received most of the funds."

Rebels fighting the transitional government frequently attack the AU troops, who have been able to do little more than protect the city's air and sea ports, its presidential palace and a few strategic blocks in between.

Wamunyinyi said more troops from Uganda and Burundi were waiting to be airlifted to bolster their numbers.

"These two countries will send an additional battalion each. As soon as the logistical arrangements are done, they will move in," he said.

He said the AU's rules of engagement were adequate, and the mission could help the government hold the capital if it decided to push away the rebels.

"We are not there to fight on behalf of Somalis. If they keep away the insurgents, that would be very good idea, a good step in the right direction."