CBN urges states to curb reliance on short-term borrowing

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 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, remained a major condition for successful inflation targeting, noting that the principle applied 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.

The deputy governor stressed that inflation targeting should be seen as a collective national commitment aimed at achieving long-term stability, economic credibility and sustainable growth.

Also speaking, the Director of the Monetary Policy Department, Dr Victor Oboh, described inflation targeting as a “win-win framework” capable of benefiting households, businesses and governments by improving policy credibility and reducing macroeconomic uncertainty.

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

According to him, the engagement was organised to deepen collaboration and mutual understanding between the CBN and state governments regarding the expectations and coordination required for the successful implementation of inflation targeting.

Delivering a goodwill message on behalf of the Director-General of the Nigerian Governors’ Forum, Dr Abdullateef Shittu, the Executive Director of Policy, Strategy and Research at the forum, Prof Olalekan Yunusa, commended the CBN for involving sub-national authorities early in the transition process.

He said the move from monetary targeting to inflation targeting reflected a deliberate commitment to price stability, adding that sustainable macroeconomic stability required disciplined coordination across all tiers of government.

The engagement attracted participants from over 20 states, including commissioners of finance and economic planning, accountants-general, permanent secretaries, statisticians-general and directors, who reaffirmed support for the CBN’s reform agenda and transition to inflation targeting.

The PUNCH earlier reported that 32 and the Federal Capital Territory’s debt rose to nearly $5.7bn in fresh external loans in 2025, driving a year-on-year surge in subnational foreign debt despite higher inflows from Federation Account Allocation Committee disbursements.

Data from the Debt Management Office indicated that the combined external debt stock of the 36 states and the FCT increased from $4.80bn as of December 31, 2024, to $5.68bn as of December 31, 2025, reflecting a net increase of $884.66m, or 18.43 per cent year-on-year.

A breakdown of the data showed that 33 out of the 37 subnational entities recorded increases in their external debt positions during the period under review, representing 89.19 per cent of the total, while only four states posted declines, accounting for 10.81 per cent.

The scale of the increase shows a continued reliance on external financing by state governments amid fiscal pressures, infrastructure demands, and rising FAAC revenues.