The Central Bank of Nigeria (CBN) has urged state governments to reduce their dependence on overdrafts and short-term borrowing, warning that poor fiscal management at the sub-national level could threaten Nigeria’s transition to an inflation-targeting monetary policy framework.
The warning was contained in a statement issued by the apex bank on Sunday after 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, Dr Muhammad Abdullahi, said state governments must embrace stricter fiscal discipline to support ongoing macroeconomic reforms and maintain price stability.
According to the statement, Abdullahi advised states to reduce their reliance on overdrafts and short-term financing while ensuring that borrowing decisions align with debt sustainability thresholds.
He also urged state governments to improve budget realism, strengthen revenue forecasting, prioritise spending, and align fiscal calendars with prevailing macroeconomic conditions.
Abdullahi explained that inflation targeting represents a more transparent, rule-based and forward-looking monetary framework that requires strong cooperation between the central bank and state governments.
He noted that while the CBN remains responsible for controlling inflation through monetary policy, fiscal activities by state governments also play a major role in influencing inflation outcomes in a federal system like Nigeria.
The deputy governor warned that inflation targeting depends heavily on managing economic expectations, stressing that expansionary fiscal policies at the state level could weaken the effectiveness of monetary policy signals.
According to him, state governments influence inflation through borrowing decisions, debt accumulation, spending patterns, wage bills, project execution, 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 stated.
He further explained that successful inflation targeting requires the absence of fiscal dominance, where governments pressure the central bank to finance deficits, adding that the principle applies to both federal and state governments.
Abdullahi outlined four major responsibilities expected from states under the new framework. These include maintaining fiscal discipline and predictability, pursuing responsible borrowing, improving coordination on debt and cash management, and strengthening internally generated revenue mobilisation.
He warned that excessive supplementary budgets, unplanned spending and rising unsustainable debt could trigger liquidity shocks and worsen inflationary pressures across the economy.
Also speaking at the engagement, the Director of the Monetary Policy Department, Dr 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 cannot be achieved through monetary policy alone, especially in a federal structure where state spending and borrowing decisions directly affect inflation and liquidity conditions.
He explained that the meeting was organised to deepen collaboration between the CBN and state governments ahead of the implementation of inflation targeting.
Delivering a goodwill message on behalf of the Director-General of the Nigerian Governors’ Forum, Prof Olalekan Yunusa commended the CBN for involving sub-national authorities early in the transition process.
Yunusa said the move from monetary targeting to inflation targeting reflects a deliberate commitment to price stability and sustainable macroeconomic management across all levels of government.
The engagement attracted participants 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, data from the Debt Management Office showed that the combined external debt of Nigeria’s 36 states and the Federal Capital Territory rose from $4.80bn as of December 2024 to $5.68bn by December 2025.
The figures represent an increase of $884.66m, or 18.43 per cent year-on-year, highlighting continued dependence on external borrowing despite higher Federation Account Allocation Committee inflows.
According to the DMO data, 33 out of the 37 sub-national entities recorded increases in their external debt positions during the review period, while only four states posted declines.
The rising debt profile underscores growing fiscal pressures on state governments amid infrastructure demands and expanding expenditure obligations.
