The Central Bank of Nigeria has urged state governments to reduce their reliance on overdrafts and short-term borrowing, warning that reckless fiscal behaviour at the sub-national level could undermine the country’s transition to an inflation-targeting monetary policy framework.
This was contained in a press statement issued by the CBN on Sunday following an engagement with sub-national stakeholders facilitated through the Nigerian Governors’ Forum Secretariat in Abuja.
According to the statement, the Deputy Governor in charge of the Economic Policy Directorate, Dr Muhammad Abdullahi, said state governments must 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 the transition to inflation targeting as a shift towards a more transparent, rule-based, and forward-looking monetary framework that requires close collaboration between the central bank and state authorities.
According to him, while the CBN remains responsible for monetary policy decisions aimed at controlling inflation, fiscal actions by state governments also significantly influence inflation outcomes in a federal system like Nigeria’s.
He warned that inflation targeting largely depends on managing economic expectations, stressing that expansionary fiscal activities by states could weaken the effectiveness of monetary policy signals.
The deputy governor noted that state governments influence inflation through borrowing decisions, debt accumulation, spending patterns, wage bills, capital project execution, salary arrears, contractor financing, and cash management practices linked 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 the absence of fiscal dominance, where governments pressure the central bank to monetise deficits, remains a major condition for successful inflation targeting, noting that the principle applies to both federal and state governments.
Abdullahi further outlined four responsibilities expected of state governments under the inflation-targeting framework, including maintaining fiscal discipline and predictability, pursuing responsible borrowing, improving coordination on cash and debt management, and strengthening internally generated revenue mobilisation.
He warned that excessive supplementary budgets, unplanned spending, and unsustainable debt accumulation could trigger liquidity shocks and worsen inflationary pressures.
