(Bloomberg) -- Malaysia is cutting blanket diesel subsidies beginning Monday, fulfilling a key pledge to improve the country’s finances.

Diesel will be sold at market prices that will be set weekly in Peninsular Malaysia, Second Finance Minister Amir Hamzah Azizan said at a press conference in Putrajaya on Sunday. Retail diesel prices will remain subsidized in the states of Sabah and Sarawak in East Malaysia.

Malaysia expects the move toward targeted diesel assistance will save the government about 4 billion ringgit ($848 million) a year, and has vowed to follow that up with unwinding blanket subsidies for RON95, the country’s cheapest and most commonly used gasoline. Smuggling of diesel into neighboring countries is costing the government billions of ringgit.

“Malaysia can ill afford to continue losing billions of ringgit to smuggling, which could otherwise be better spent to benefit Malaysians and developing our nation,” Amir said. The government spent 14.3 billion ringgit on diesel subsidies in 2023. 

The price of diesel will be set at 3.35 ringgit per liter in Peninsular Malaysia, and remain at 2.15 ringgit a liter in Sabah, Sarawak and the territory of Labuan.

More than 30,000 targeted individuals who use certain diesel vehicles will receive 200 ringgit monthly cash aid in their bank accounts starting June 10, Amir said. Certain logistics vehicles, public transport and emergency vehicles and fishermen will also be eligible to get subsidies under a targeted program.

Prime Minister Anwar Ibrahim’s administration, which aims to trim this year’s fiscal deficit to 4.3% of gross domestic product from 5% in 2023, is under pressure to phase out broad subsidies as part of reforms closely watched by investors. Still, it has to consider the strain on household spending as well as on inflation.

Malaysia’s central bank expects inflation, which has been below 2% since September, to average as much as 3.5% this year should fuel subsidies for both diesel and RON95 be phased out gradually.

There’ll be “modest savings” from Malaysia’s fuel subsidy reforms, while the RON95 subsidy rationalization is set to be a multi-year process, Bank of America economist Kai Wei Ang wrote in a note.

The Malaysian currency fell 0.5% against the dollar early Monday after a strong US jobs report prompted traders to push back the expected timing of Federal Reserve interest-rate cuts.

--With assistance from Joy Lee and Karl Lester M. Yap.

(Adds comment by analyst in ninth paragraph, performance of Malaysia’s currency in last paragraph.)

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