The Central Bank of Nigeria (CBN) has urged state governments to reduce dependence on overdrafts and short-term borrowing, warning that reckless fiscal behaviour at the sub-national level could undermine Nigeria’s transition to an inflation-targeting monetary policy framework.
The warning was contained in a statement issued by the apex bank following an engagement with state government stakeholders facilitated through the Nigerian Governors’ Forum Secretariat in Abuja.
According to the Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, state governments must adopt stricter fiscal discipline to support ongoing macroeconomic reforms and maintain price stability.
“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 explained that the move toward inflation targeting represents a more transparent and forward-looking monetary policy system that requires stronger cooperation between the central bank and state governments.
According to him, although the CBN remains responsible for monetary policy decisions aimed at controlling inflation, fiscal actions by state governments also play a major role in determining inflation outcomes within a federal system like Nigeria.
He warned that inflation targeting depends heavily on managing public and market expectations, stressing that expansionary spending and borrowing by state governments could weaken the effectiveness of monetary policy measures.
The deputy governor further noted that state governments influence inflation through borrowing patterns, debt accumulation, salary obligations, spending behaviour, contractor financing 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 said.
He added that successful inflation targeting also depends on avoiding fiscal dominance, where governments pressure the central bank to finance deficits, noting that the principle applies to both federal and state governments.
Abdullahi outlined several responsibilities expected from state governments under the new framework, including maintaining fiscal discipline, borrowing responsibly, improving debt and cash management coordination, and strengthening internally generated revenue.
He also warned that excessive supplementary budgets, unplanned spending and unsustainable debt accumulation could trigger liquidity shocks and worsen inflationary pressures.
Speaking further, the Director of the Monetary Policy Department, Victor Oboh, described inflation targeting as a “win-win framework” capable of benefiting households, businesses and governments through improved policy credibility and reduced uncertainty.
The engagement attracted officials from more than 20 states, including commissioners of finance, economic planning officials and accountants-general, who reportedly expressed support for the CBN’s reform agenda.
The development comes amid rising concerns over increasing debt levels among state governments.
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 at the end of 2024 to $5.68bn by December 2025.
