IA It’s already a fact emphasized on the fact that the introduction of a 50% tax on bank profits for the second year in a row contradicts the principles of taxation. The publication referred to the opinion of the deputy head of the IMF mission, Trevor Lessard, who named the repeated increase of the tax on the profits of banks is ineffective. “Windfall taxes are only applied for one year: you pay a political price for raising taxes, you get a lot of resistance… If you introduce a windfall tax more than once, people start to react and you start to lose credibility in politics.”, Lessard said in an interview with the Interfax-Ukraine agency in Washington. He emphasized the importance of long-term revenue growth instead of one-off decisions that could force banks to change strategies. The NBU also sees risks in such a tax and offers alternatives to cover the budget deficit.
Despite these instructions, the President of Ukraine, Volodymyr Zelenskyi signed the law, which doubles – up to 50% – the income tax for banks. This is the solution will act from the results of banking activity in 2024. The National Bank of Ukraine estimated that private banks should pay approximately 19 billion hryvnias to the budget. State banks are not taken into account in the calculations, because their profit goes to the budget anyway. This is not the first such increase: back in 2023 tax for banks increased from 18% to 50%, and retroactively – banks had to pay extra for all previous months of the year.
Why the increase in tax for banks caused a lot of criticism
Quite legitimate questions arise: will banks lose the trust of customers, will credit rates rise and will this lead to problems in the banking system? There are also concerns about how it will affect the economy in general.
The National Bank of Ukraine believes that due to the increase in taxes, banks will be forced to spend more money on paying taxes, instead of lending to businesses and the population. This can slow down the development of the economy, because the possibility of affordable credit is crucial for enterprises.
Previously, the National Bank and the Ministry of Finance opposed the idea of raising taxes to 50%, as this would reduce the profitability of banks, affect their competitiveness and reduce the investment attractiveness of the Ukrainian financial industry. The IMF, in turn, notes that high taxes can hinder economic reforms and cause capital outflow from the country.
Tax increase to 50% – consequences for banks and the economy
In recent years, Ukrainian banks have been making good money thanks to loans, currency transactions and government bonds. This strengthened their capitalization and provided them with some stability. However, doubling the tax will reduce their profits and the ability to create a “safety cushion” in case of crises.
To compensate for the losses due to the high fiscal burden, banks are likely to raise lending rates. A chain reaction will work: for businesses and ordinary people, loans will become more expensive, and therefore less money will be spent on development and purchases. This slows down economic growth. If the government frequently changes the rules of the game, customers may start to worry that banks are becoming weaker. This could lead to people withdrawing their deposits and some of the smaller banks could have money problems.
State banks hardly suffer from this tax, because their profit goes to the budget anyway. But it creates an uneven playing field for private banks, and it will be harder for them to compete.
Will the increase in the bank income tax lead to another bank failure?
It is too early to talk about a “bankruptcy” at the moment. Some experts believe that raising the bank’s income tax to 50% could negatively affect their capitalization and ability to issue loans. Yes, the chairman of the board of OTP Bank Volodymyr Mudry noted, that an increase in the tax burden may reduce the banks’ ability to reinvest profits in the Ukrainian economy.
Financial expert Vasyl Nevmerzhitskyi a warning, that an increase in the tax burden could be a doom for some banks, especially small ones that cannot compete with large banks and have high costs of doing business. However, there is currently no unanimous opinion among experts regarding the immediate bankruptcy of banks due to the tax increase. Many believe that mass bankruptcies of banks are still unlikely, but emphasize the importance of carefully monitoring the development of the situation and assessing risks for the financial system of Ukraine.
The concern of Ukrainians about the probable bankruptcy of banks has deep roots, because over the past three decades, our nation has repeatedly found itself in the vortex of financial disasters and insidious frauds. Each such blow destroyed savings, destroyed hopes and burned confidence in financial institutions, leaving painful traces in the economic memory of citizens. And today, these bitter lessons of the past remind us of themselves, like ghosts of old crises. So, the fairy tale is a lie, but there is a hint in it…
Pavlov monetary reform
…The Pavlovian monetary reform of 1991 is remembered by members of Generation X and baby boomers as one of the most painful episodes in the economic history of the decline of the Soviet Union. Aiming to deal with economic chaos, it instead impoverished millions of people.
The reform provided for the withdrawal from circulation of 50 and 100 ruble bills, which were in abundance in monetary circulation. Reducing the money supply in circulation was necessary to curb inflation and deprive speculators of illegally obtained funds. The government wanted to carry out these measures in a flash, allocating only three days for the exchange of old bills for new ones.
However, the reality turned out to be cruel. Many citizens, especially in the hinterland, did not have time to physically exchange their savings due to lack of information, technical difficulties or queues at banks. For pensioners, families with children and residents of remote rural areas, it became a disaster. The money they relied on for survival suddenly turned into worthless pieces of paper.
Social tension grew every hour. People were outraged by the suddenness and brutality of such measures. The loss of savings undermined not only material, but also psychological stability. Confidence in the government and the financial system has been destroyed. Many realized that their money was at risk, and this created a gulf between citizens and the authorities.
The economic consequences of the Pavlovian reform were catastrophic. The decrease in cash led to a reduction in consumption, businesses felt short of funds, and this exacerbated the economic downturn. Inflation continued to rise and financial instability deepened. This experience showed the danger of rash decisions in the economy. The reform destroyed the savings of millions of people and contributed to the financial crisis.
Collapse of the Savings Bank of the USSR
One of the most painful aspects of the collapse of the USSR was the loss of savings that Ukrainians entrusted to the USSR Savings Bank. When the Soviet Union collapsed in 1991, the established financial system suddenly disappeared. Oschadbank found itself in a legal and economic vacuum. The newly independent states, including Ukraine, were not ready to share financial obligations. This created chaos in which citizens were left alone with their problems.
The hyperinflation that gripped the post-Soviet space turned savings into devalued pieces of paper. The money that people have saved for years for housing, education or a peaceful old age has lost its purchasing power. The last blow, which deprived millions of our fellow citizens of even the illusion of financial security, was the freezing of deposits.
For many fellow citizens, this loss had catastrophic consequences, they lost not only money, but also faith in the banking system and the state. Social indignation transformed into long-term distrust of financial institutions, which inhibited the development of the economy. Many Ukrainians avoided banks and kept money at home, which reduced the volume of deposits and limited banks’ access to resources.
This situation also had a political impact. The issue of compensation for lost savings was the main populist slogan of the election campaigns, but these promises remained unfulfilled. Sporadic attempts to compensate for lost deposits have not completely solved the problem.
… Next time we will continue a short historical excursion, recalling the precedents due to which fears about the instability of the domestic financial system quite naturally settled in the mass consciousness. In particular, we will talk about the financial pyramids of the 1990s, the bankruptcy of the Bank “Ukraine” and the massive bank failure of 2014-2016.
Tetyana Viktorova
