CBN warns states to cut overdrafts and unsustainable borrowing to support Nigeria’s inflation-targeting policy framework

The Central Bank of Nigeria has warned state governments against excessive borrowing and reliance on overdrafts, cautioning that reckless fiscal practices at the sub-national level could undermine Nigeria’s planned transition to an inflation-targeting monetary policy framework.

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The warning was contained in a statement issued by the apex bank on Sunday following an engagement with state government officials facilitated through the Nigerian Governors’ Forum Secretariat in Abuja.

Speaking during the engagement, the Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, urged state governments to adopt stronger fiscal discipline to support ongoing macroeconomic reforms and maintain price stability.

According to the statement, Muhammad Abdullahi advised states to reduce dependence on overdrafts and short-term financing while ensuring that borrowing decisions align with debt sustainability thresholds.

The deputy governor also called on states to improve budget realism, strengthen revenue forecasting, prioritise expenditure and synchronise fiscal calendars with prevailing macroeconomic conditions.

Muhammad Abdullahi described inflation targeting as a more transparent, rule-based and forward-looking monetary framework that requires close cooperation between the central bank and state governments.

He noted that while the CBN remains responsible for monetary policy and inflation control, fiscal activities at the state level significantly influence inflation outcomes in a federal system such as Nigeria.

“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” Muhammad Abdullahi said.

The deputy governor warned that inflation targeting depends heavily on managing public and market expectations, stressing that excessive spending and uncoordinated borrowing by states could weaken the effectiveness of monetary policy signals.

He explained that state governments influence inflation through wage bills, debt accumulation, borrowing patterns, project financing, salary arrears and cash management practices linked to Federation Account Allocation Committee allocations.

Muhammad Abdullahi further stated that the absence of fiscal dominance, where governments pressure central banks to finance deficits, remains essential for successful inflation targeting.

He outlined four major responsibilities expected from state governments under the new framework, including maintaining fiscal discipline, promoting responsible borrowing, improving coordination on debt and cash management, and strengthening internally generated revenue.

The deputy governor warned that frequent supplementary budgets, unplanned expenditure and unsustainable debt accumulation could trigger liquidity shocks and intensify inflationary pressures.

Also speaking at the event, Director of the Monetary Policy Department at the CBN, Victor Oboh, described inflation targeting as a powerful framework capable of improving policy credibility and reducing economic uncertainty.

Victor Oboh said price stability could not be achieved through monetary policy alone because state spending and borrowing decisions directly affect liquidity conditions and inflation levels.

According to him, the engagement was organised to strengthen collaboration between the CBN and state governments ahead of the transition to inflation targeting.

Delivering a goodwill message on behalf of the Director-General of the Nigerian Governors’ Forum, Abdullateef Shittu, Executive Director of Policy, Strategy and Research at the forum, Olalekan Yunusa, commended the CBN for involving sub-national governments early in the reform process.

Olalekan Yunusa said the shift from monetary targeting to inflation targeting reflected a deliberate effort to achieve long-term price stability and macroeconomic credibility.

The meeting attracted officials from more than 20 states, including commissioners of finance and economic planning, accountants-general, permanent secretaries and statisticians-general, who reportedly expressed support for the CBN’s reform agenda.

The warning comes amid rising debt levels among Nigeria’s sub-national governments.

Data from the Debt Management Office earlier showed that the combined external debt of the 36 states and the Federal Capital Territory rose from $4.80bn at the end of 2024 to $5.68bn by December 2025.

The figures reflected an increase of $884.66m, representing an 18.43 per cent year-on-year rise in sub-national foreign debt.

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Analysts said the sharp increase highlights continued dependence on external financing by state governments despite higher Federation Account Allocation Committee inflows.