Doubled Deposit Interest Tax Rate Troubles Bankers

Bankers have opposed the government’s decision to double the tax rate on deposit interest, arguing the move will discourage saving. The government is upping the rate to 10 percent as part of its aggressive drive to boost tax revenue.

Bank executives decried the change during the Ethiopian Finance Forum held Tuesday. Among them was Zemen Bank chief Dereje Zebene, who called on the government to reverse the decision and explore other options.

Dereje, who joined Zemen as president in 2018, fears the move will shrink the incentive for depositors to save money at banks, which will in turn lead to liquidity problems and ultimately hurt loan disbursements and investment.

“Without mobilizing more money from depositors, banks cannot provide more capital for investors. Government policy should prioritize how to incentivize saving, not the other way round,” said the President. “I doubt whether serious research was conducted before doubling the tax rate on deposit income. We expected new policy packages that encourage depositors to save more money—what we see now is otherwise.”

Experts who spoke to The Reporter also worry the move is untimely and detached from the economic context. They observe that high inflation rates already negate bank deposit interest rates, which sit near seven percent. The government’s latest figures put headline inflation at more than double that figure.

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Deposit interest rates also pale in comparison the interest banks charge on loans, which can go as high as 24 percent.

The discrepancies were noted by Dereje.

“Inflation is higher than the deposit interest rate. This means the saving rate is negative,” he said.

Experts also foresee the increased tax rate could push banks to raise loan interest rates.

During the forum, bankers and investors asked NBE regulators and Ministry of Finance officials why loan interest rates for critical sectors like agriculture are not lowered.

Abie Sano, president of the Commercial Bank of Ethiopia, said the state-owned giant offers credit to the agriculture sector with a reduced interest rate—one percentage point lower than the rate offered by private banks.

NBE Governor Mamo Mihretu and Agriculture Minister Girma Amente (PhD), stated they are developing packages to lower loan interest for agriculture, as well as mechanisms to allow farmers to borrow without collateral.

Ethiopia’s savings-to-GDP ratio increased from 20 percent in 2000 to 33 percent in 2018, before it declined to 18 percent in 2024, according to an UNDP report from April 2024.

The African Development Bank (AfDB) has slightly different figures. Its latest reports indicate that Ethiopia’s gross domestic savings has grown from 9.5 percent of GDP in 2004 to 24.3 percent in 2020 through its banking nonbank financial institutions.