Business Briefings
CBN Urges States To Reduce Reliance On Overdrafts, Short-Term Borrowing
The Central Bank of Nigeria has urged state governments to reduce dependence on overdrafts and short-term financing, warning that excessive borrowing at the sub-national level could undermine efforts to achieve price stability under the country’s proposed inflation-targeting framework.
The apex bank made the call during an engagement with sub-national stakeholders facilitated through the Nigeria Governors’ Forum Secretariat.
Speaking at the event, the Deputy Governor in charge of Economic Policy Directorate, Muhammad Abdullahi, stressed that fiscal discipline across all levels of government remains essential for the successful implementation of inflation targeting in Nigeria.
According to a statement issued by the central bank, Abdullahi advised state governments to ensure that borrowing decisions align with debt sustainability thresholds while improving budget realism, expenditure prioritisation, and revenue forecasting.
He also called for stronger coordination between fiscal and monetary authorities to improve macroeconomic stability.
Abdullahi explained that inflation targeting represents a transition toward a more transparent, rule-based, and forward-looking monetary policy framework that requires close cooperation between the central bank and sub-national governments.
He noted that while the CBN retains responsibility for deploying monetary policy tools to manage inflation, fiscal activities at the state level significantly influence overall inflation outcomes within a federal system such as Nigeria’s.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” he said.
The Deputy Governor stated that state governments influence inflation through several channels, including borrowing decisions, domestic debt accumulation, wage obligations, expenditure patterns, salary arrears, contractor financing arrangements, overdrafts, and management of Federation Account Allocation Committee receipts.
According to him, weak coordination in debt servicing and cash management at the state level could weaken the effectiveness of monetary policy measures introduced by the central bank.
He emphasised that inflation targeting is fundamentally aimed at managing market expectations and maintaining confidence in monetary policy direction.
Abdullahi warned that expansionary fiscal actions by states could reinforce inflationary pressures and weaken policy signals issued by the apex bank.
He further stressed that the absence of fiscal dominance, where governments rely excessively on central bank financing to fund deficits, remains a critical requirement for the success of inflation targeting.
“The absence of fiscal dominance, where government borrowing pressures compel the bank to monetise deficits, is a core prerequisite for successful inflation targeting,” he stated.
According to him, the principle applies not only to the federal government but equally to state governments across the federation.
The Deputy Governor urged states to reduce reliance on overdrafts and short-term financing arrangements while ensuring that public borrowing remains within sustainable thresholds.
He also called on state governments to improve internally generated revenue mobilisation and align fiscal calendars with prevailing macroeconomic realities.
Under the proposed inflation-targeting framework, Abdullahi outlined four major responsibilities expected from state governments, including maintaining fiscal discipline and predictability, adopting responsible borrowing practices, strengthening debt and cash management coordination, and enhancing internally generated revenues.
He warned that unplanned expenditures, unsustainable debt accumulation, and excessive supplementary budgets could trigger liquidity shocks capable of worsening inflationary pressures.
According to him, inflation targeting should be viewed as a collective national commitment aimed at ensuring long-term economic stability and growth.
“While the CBN remains accountable for delivering price stability, the framework’s success ultimately depends on disciplined fiscal behaviour across all tiers of government,” he said.
Also speaking at the engagement, Director of Monetary Policy Department at the CBN, Victor Oboh, described inflation targeting as a “win-win framework” capable of benefiting businesses, households, and governments by improving policy credibility and reducing macroeconomic uncertainty.
Oboh stated that price stability cannot be achieved through monetary policy measures alone, particularly in a federal system where fiscal operations by sub-national governments directly affect liquidity conditions and aggregate demand.
He explained that the engagement was designed to strengthen dialogue and collaboration between the apex bank and state governments regarding the coordination mechanisms required for the successful implementation of inflation targeting.
According to him, sub-national governments play a major role in Nigeria’s macroeconomic landscape because their decisions on capital spending, debt accumulation, wage policies, and revenue mobilisation directly influence inflation dynamics.
The engagement also featured goodwill messages from officials of the Nigeria Governors’ Forum, who commended the central bank for involving state governments early in the transition process toward inflation targeting.
Participants at the meeting, including Commissioners of Finance, Economic Planning officials, Accountant-Generals, Permanent Secretaries, and statisticians from more than 20 states, expressed support for the reform agenda and pledged cooperation with the apex bank’s policy direction.
