(Bloomberg) -- Ecuador’s President Daniel Noboa is seeking to raise taxes to shore up the government’s teetering finances after declaring war on the drug gangs terrorizing the country. Bonds rallied. 

In a bill submitted to the National Assembly overnight, he said he wanted to lift the value-added tax, or VAT, to 15% from 12% to help fund security measures to curb soaring violence. 

“This catastrophic crisis provokes the need to buy weapons and supplies for military and police equipment to confront the domestic armed conflict,” the government said in the bill.

Ecuador’s dollar bonds outperformed most emerging-market peers Friday morning, with notes due 2040 climbing over 1.1 cents on the dollar to 34 cents, the highest in more than two months, according to indicative pricing data compiled by Bloomberg.

The government says the VAT hike could provide $1 billion in revenue this year if it goes into effect in March, and $1.3 billion annually after that. The tax hike would be a permanent measure, rather than a short-term increase to address the crisis. 

“If it’s approved, it’s an important and permanent move,” former finance minister Simon Cueva said, in response to written questions. “It opens the door for an IMF accord, multilateral financing and that helps to provide liquidity.”  

On Thursday, S&P Global Ratings cut its outlook on Ecuadorian debt to negative from stable, saying the security crisis could limit Noboa’s ability to cut the fiscal deficit. 

Ballooning Deficit 

Finance Minister Juan Carlos Vega in a recent interview said he was planning to go to the IMF this month, with Ecuador wanting to offer spending cuts equivalent to about 2% of gross domestic product to continue to access multilateral loans amid a widening deficit. In 2023, the fiscal gap ballooned to about 5% of GDP from less than 2% in 2022.

Ecuador’s National Assembly, where Noboa has allied with former President Rafael Correa’s Citizen Revolution and the anti-tax Social Christian Party, has so far supported the 36-year-old Noboa. 

Earlier in the week, Noboa also moved to loosen Ecuador’s rigid labor regime and widen international arbitration, promising to put these issues to voters in a referendum. 

The assembly passed two previous economic fast-track bills since he took office Nov. 27 and on Wednesday backed his declaration of a “non-international armed conflict” unanimously.

--With assistance from Zijia Song.

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