CBN seeks tighter state borrowing controls to curb inflation

The Central Bank of Nigeria has urged state governments to reduce dependence on overdrafts and short-term borrowing, warning that unchecked fiscal practices at the sub-national level could threaten the country’s planned transition to an inflation-targeting monetary policy framework.

The warning was contained in a statement issued by the CBN on Sunday after an engagement with state government officials organised through the Nigerian Governors’ Forum Secretariat in Abuja.

Speaking during the meeting, the Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, called on states to adopt stricter fiscal discipline to support price stability and ongoing economic reforms.

According to the statement, Abdullahi advised states to reduce reliance on overdrafts and short-term financing, ensure borrowing aligns with debt sustainability limits, improve budget planning and revenue forecasting, prioritise spending, and align fiscal calendars with prevailing economic realities.

He described the transition to inflation targeting as a move toward a more transparent and forward-looking monetary framework that requires strong collaboration between the CBN and state governments.

Abdullahi explained that although the apex bank is responsible for monetary policy decisions aimed at controlling inflation, fiscal actions taken by state governments also play a major role in influencing inflation in a federal system like Nigeria.

He warned that inflation targeting depends heavily on managing public and market expectations, noting that expansionary spending by states could weaken the effectiveness of monetary policy measures.

According to him, states influence inflation through borrowing patterns, debt accumulation, expenditure levels, wage bills, project implementation, salary arrears, contractor financing, and cash management practices connected 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 added that avoiding fiscal dominance, where governments pressure the central bank to finance deficits, remains essential for the success of inflation targeting at both federal and state levels.

The deputy governor outlined four major responsibilities for state governments under the framework, including maintaining fiscal discipline, ensuring responsible borrowing, improving coordination on debt and cash management, and strengthening internally generated revenue.

He also cautioned against excessive supplementary budgets, unplanned expenditures, and unsustainable debt accumulation, warning that such practices could trigger liquidity shocks and worsen inflationary pressures.

Abdullahi stressed that inflation targeting should be viewed as a collective national effort aimed at achieving long-term economic stability, credibility, and sustainable growth.

Also speaking at the event, the Director of the Monetary Policy Department, Victor Oboh, described inflation targeting as a framework that could benefit households, businesses, and governments by improving policy credibility and reducing economic uncertainty.

Oboh noted that price stability cannot be achieved through monetary policy alone, especially in a federal system where state spending and borrowing decisions directly affect inflation and liquidity conditions.

He said the engagement was organised to deepen collaboration between the CBN and state governments and to improve understanding of the coordination required for the successful implementation of inflation targeting.

Delivering a goodwill message on behalf of 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 involving state governments early in the process.

Yunusa said the shift from monetary targeting to inflation targeting reflects a deliberate commitment to price stability and stressed that lasting macroeconomic stability requires coordinated discipline across all levels of government.

The engagement attracted representatives from more than 20 states, including commissioners of finance and economic planning, accountants-general, permanent secretaries, statisticians-general, and directors, who pledged support for the CBN’s reform agenda.

Meanwhile, recent figures 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 31, 2025.

The increase represents a rise of $884.66m, or 18.43 per cent year-on-year, highlighting continued dependence on external borrowing by state governments despite increased allocations from the Federation Account Allocation Committee.

The data further showed that 33 of the 37 subnational entities recorded increases in their external debt positions during the review period, while only four states posted declines.