Nigeria: CBN Urges States to Reduce Dependence on Overdrafts Amid Inflation Targeting Shift

The Central Bank of Nigeria has called on state governments to reduce their dependence on overdrafts and short-term borrowing, warning that weak fiscal discipline at the sub-national level could undermine Nigeria’s planned transition to an inflation-targeting monetary policy framework.

The warning was contained in a statement issued by the apex bank following an engagement with sub-national stakeholders organised through the Nigerian Governors’ Forum Secretariat in Abuja.

Speaking during the engagement, the Deputy Governor in charge of the Economic Policy Directorate at the Central Bank of Nigeria, Muhammad Abdullahi, stressed the need for state governments to strengthen fiscal discipline in support of macroeconomic stability and ongoing monetary reforms.

According to the CBN, Abdullahi urged states to reduce reliance on overdrafts and short-term financing arrangements, align borrowing decisions with sustainable debt thresholds, improve budget realism and revenue forecasting, and prioritise expenditure management.

He also advised state governments to better synchronise fiscal calendars with prevailing macroeconomic conditions to improve policy coordination across all levels of government.

Abdullahi described the transition to inflation targeting as a shift toward a more transparent, forward-looking, and rule-based monetary policy framework that requires close cooperation between fiscal and monetary authorities.

While noting that the CBN remains responsible for controlling inflation through monetary policy measures, he emphasised that fiscal activities by state governments significantly influence inflation dynamics in a federal system such as Nigeria’s.

He warned that inflation targeting depends heavily on the management of economic expectations and cautioned that expansionary fiscal behaviour at the sub-national level could weaken the effectiveness of monetary policy interventions.

According to him, state governments affect inflation through their borrowing patterns, debt accumulation, wage obligations, capital expenditure implementation, salary arrears, contractor financing arrangements, and cash management practices 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 stated.

He further stressed that the absence of fiscal dominance, where governments pressure central banks to monetise fiscal deficits, remains a key requirement for successful inflation targeting.

The deputy governor outlined four major responsibilities expected from state governments under the new framework, including maintaining fiscal discipline and predictability, pursuing sustainable borrowing practices, improving cash and debt management coordination, and strengthening internally generated revenue mobilisation.

He warned that excessive supplementary budgets, unplanned expenditures, and unsustainable debt accumulation could trigger liquidity pressures and worsen inflationary conditions across the economy.

Also speaking at the engagement, the Director of Monetary Policy at the Central Bank of Nigeria, Victor Oboh, described inflation targeting as a “win-win framework” capable of improving policy credibility, reducing uncertainty, and supporting economic stability for households, businesses, and governments.

Oboh noted that price stability cannot be achieved through monetary policy alone, especially in a federal structure where state-level fiscal decisions directly affect liquidity conditions and inflation outcomes.

He explained that the engagement was organised to deepen collaboration between the CBN and state governments on the coordination required for the effective implementation of the inflation-targeting framework.

Representing the Director-General of the Nigerian Governors’ Forum, the Executive Director of Policy, Strategy and Research at the forum, Olalekan Yunusa, commended the CBN for involving sub-national authorities early in the transition process.

According to him, the move from monetary targeting to inflation targeting demonstrates a deliberate commitment to achieving price stability and long-term macroeconomic sustainability.

The engagement attracted officials from more than 20 states, including commissioners of finance and economic planning, accountants-general, permanent secretaries, statisticians-general, and senior government officials, who reaffirmed support for the apex bank’s reform agenda.

Recent data from the Debt Management Office showed that the combined external debt stock of the 36 states and the Federal Capital Territory rose from $4.80bn in December 2024 to $5.68bn by December 2025, representing an increase of $884.66m or 18.43 per cent year-on-year.

The figures indicate that most sub-national governments continue to rely heavily on external financing despite increased Federation Account allocations and growing concerns over debt sustainability.