The Central Bank of Nigeria (CBN) has warned state governments to curb their dependence on overdrafts and short-term borrowing, cautioning that indiscipline at the sub-national level risks undermining Nigeria’s transition to an inflation-targeting monetary policy framework.
In a statement issued on Sunday after an engagement with state officials through the Nigerian Governors’ Forum secretariat in Abuja, the central bank said tighter coordination between fiscal and monetary authorities was essential if the country hoped to achieve lasting price stability.
The Deputy Governor overseeing the Economic Policy Directorate, Muhammad Abdullahi, urged state governments to embrace stricter fiscal discipline, arguing that inflation control could not succeed if governors continued to rely heavily on debt-financed spending.
According to the statement, Abdullahi called on states to reduce their use of overdrafts and short-term financing arrangements, align borrowing with debt sustainability limits, improve budget credibility and revenue forecasting, and better synchronise fiscal calendars with prevailing macroeconomic realities.
He described the shift towards inflation targeting as a move to a “more transparent, rule-based and forward-looking” monetary framework, one that requires close cooperation between the central bank and state governments.
While the CBN retains responsibility for setting monetary policy and controlling inflation, Abdullahi said the fiscal conduct of state governments plays a decisive role in shaping inflation outcomes within a federal system such as Nigeria’s.
He warned that inflation targeting depends heavily on public confidence and economic expectations, adding that expansionary spending by states could dilute the impact of monetary policy signals.
State governments, he noted, influence inflation through their borrowing practices, debt accumulation, wage obligations, capital project execution, contractor payments and broader cash management linked to Federation Account Allocation Committee allocations.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” Abdullahi said.
He added that avoiding “fiscal dominance” — where governments pressure central banks to finance deficits — remained a core condition for successful inflation targeting, and stressed that the principle applied to both federal and state administrations.
The deputy governor outlined four areas where states would be expected to show greater discipline under the framework: fiscal predictability, responsible borrowing, improved cash and debt management coordination, and stronger internally generated revenue mobilisation.
He also warned that excessive supplementary budgets, unplanned expenditure and mounting debt burdens could trigger liquidity shocks and intensify inflationary pressures across the economy.
Abdullahi framed inflation targeting as a broader national project aimed at restoring macroeconomic credibility, stabilising prices and supporting sustainable long-term growth.
Also speaking at the engagement, the Director of the Monetary Policy Department, Victor Oboh, described inflation targeting as a “win-win framework” capable of improving policy credibility while reducing uncertainty for households, businesses and governments alike.
Oboh said price stability could not be delivered through monetary policy alone, particularly in a federation where state spending patterns and borrowing decisions directly shape liquidity conditions.
He explained that the engagement was organised to deepen cooperation and improve understanding between the CBN and state governments over the demands of the new policy framework.
Representing the Director-General of the Nigerian Governors’ Forum, Abdullateef Shittu, the forum’s Executive Director for Policy, Strategy and Research, Olalekan Yunusa, praised the CBN for consulting state authorities early in the transition process.
Yunusa said the move from monetary targeting to inflation targeting reflected a deliberate commitment to price stability, but warned that sustainable macroeconomic stability would depend on disciplined coordination across all levels of government.
The meeting drew officials from more than 20 states, including commissioners for finance and economic planning, accountants-general, permanent secretaries and statisticians-general, many of whom pledged support for the central bank’s reform agenda.
The warning comes amid mounting concern over the pace of sub-national borrowing. Recent figures from the Debt Management Office showed that the combined external debt stock of Nigeria’s 36 states and the Federal Capital Territory climbed from $4.80bn at the end of 2024 to $5.68bn by December 2025 — an increase of $884.66m, or 18.43%.
Data from the DMO indicated that 33 of the country’s 37 sub-national entities recorded increases in their foreign debt exposure during the period, underscoring the growing dependence of state governments on external financing despite stronger Federation Account allocations.
