QUITO - Ecuador will start to gradually reduce its gasoline subsidy from the second quarter of this year, as well as work to improve the electrical grid and build a national refining system, President Daniel Noboa said on Tuesday.

Noboa wants the measures to help finance his military offensive against criminal gangs, which he has designated as terrorist groups.

As the country's economy struggles with liquidity problems and external debt, the president has also asked the National Assembly to approve increases to value added tax (VAT) and he wants to delay the closure of the ITT oil block in the Amazon.

"We agree with targeting subsidies,"  Noboa said in an interview with Ecuavisa, a local television channel. "(But) we cannot change subsidies that affect the people or the country's competitiveness. It has to be progressive; we cannot strike at once, but rather as we generate greater efficiencies."

Subsidies will be removed gradually from gasoline, he said, adding that domestic gas and diesel will not be affected by the change.

Last year Ecuador expected to allocate more than $2.6 billion of its budget to fuel subsidies.

The government is looking for foreign investment to build a diesel refining system in Ecuador and improve the electrical grid to make eliminating the subsidies sustainable, Noboa said.

Noboa's VAT proposal would increase sales tax from 12% to 15% until 2026, when it would decline to 13%. The bill would also levy taxes on the profits of private banks and large companies. REUTERS