The Central Bank of Nigeria has urged state governments to reduce their dependence on overdrafts and short-term borrowing, warning that poor fiscal discipline at the sub-national level could threaten the country’s planned transition to an inflation-targeting monetary policy framework.
The apex bank disclosed this in a statement issued on Sunday after an engagement with state government officials facilitated by the Nigerian Governors’ Forum in Abuja.
According to the statement, the Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, urged state governments to adopt stricter fiscal discipline to support price stability and ongoing macroeconomic reforms.
“He urged states to reduce reliance on overdrafts and short-term financing, ensure that borrowing decisions align with debt sustainability thresholds, improve budget realism and revenue forecasting, prioritise expenditure, and better synchronise fiscal calendars with prevailing macroeconomic conditions,” the statement said.
Abdullahi described inflation targeting as a more transparent, rule-based and forward-looking monetary policy framework that requires close coordination between the Central Bank and state governments.
He said although the CBN is responsible for monetary policy decisions aimed at controlling inflation, fiscal activities by state governments also affect inflation outcomes in a federal system like Nigeria’s.
According to him, inflation targeting depends heavily on managing economic expectations, warning that expansionary fiscal behaviour by states could weaken the effectiveness of monetary policy measures.
The deputy governor said state governments influence inflation through borrowing decisions, debt accumulation, spending patterns, wage bills, capital project execution, salary arrears, contractor financing and cash management practices tied to Federation Account Allocation Committee receipts.
“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 successful inflation targeting requires the absence of fiscal dominance, where governments pressure the central bank to finance deficits, noting that the principle applies to both federal and state governments.
Abdullahi outlined four major responsibilities for state governments under the framework: maintaining fiscal discipline and predictability, pursuing responsible borrowing, improving coordination on cash and debt management, and strengthening internally generated revenue.
He warned that excessive supplementary budgets, unplanned spending and unsustainable debt accumulation could trigger liquidity shocks and worsen inflationary pressures.
Also speaking, the Director of the Monetary Policy Department, Victor Oboh, described inflation targeting as a “win-win framework” capable of improving policy credibility and reducing macroeconomic uncertainty for households, businesses and governments.
Oboh said price stability could not be achieved through monetary policy alone because state spending, borrowing and cash flow decisions directly affect inflation and liquidity conditions.
Representing the Director-General of the Nigerian Governors’ Forum, Abdullateef Shittu, the forum’s Executive Director of Policy, Strategy and Research, Olalekan Yunusa, commended the CBN for engaging state governments early in the transition process.
Yunusa said the shift from monetary targeting to inflation targeting reflected a deliberate commitment to price stability and sustainable macroeconomic growth.
The meeting attracted officials from more than 20 states, including commissioners of finance and economic planning, accountants-general, permanent secretaries and statisticians-general, who pledged support for the CBN’s reform agenda.
Meanwhile, recent data from the Debt Management Office showed that the combined external debt of the 36 states and the Federal Capital Territory rose from $4.80bn in December 2024 to $5.68bn in December 2025.
The figures represent an increase of $884.66m, or 18.43 per cent, year-on-year.
The data also showed that 33 states and the FCT recorded increases in their external debt positions during the period, reflecting continued dependence on external financing despite improved FAAC allocations.
