CBN Warns State Governments Against Reckless Borrowing, Urges Fiscal Discipline
By Aboki Forex —
The Central Bank of Nigeria has told state governments to stop relying heavily on overdrafts and short-term loans. The CBN warned that reckless spending by states could hurt the country’s move to an inflation-targeting monetary policy.
In a statement released on Sunday after a meeting with sub-national officials at the Nigerian Governors’ Forum Secretariat in Abuja, the CBN said state governments must adopt stricter fiscal discipline. This is to support price stability and ongoing economic reforms.
Dr Muhammad Abdullahi, the Deputy Governor in charge of the Economic Policy Directorate, said states must reduce their use of overdrafts and short-term financing. He also said borrowing must match debt sustainability limits. He called for better budget realism, improved revenue forecasting, and spending that aligns with current economic conditions.
Abdullahi described the shift to inflation targeting as a move toward a more transparent and rule-based monetary framework. He said it requires close teamwork between the central bank and state authorities. While the CBN handles monetary policy to control inflation, fiscal decisions by states also affect inflation in a federal system like Nigeria’s.
He warned that inflation targeting depends on managing expectations. Expansionary fiscal actions by states could weaken the impact of monetary policy signals. The deputy governor noted that states influence inflation through borrowing, debt accumulation, spending, wage bills, capital projects, salary arrears, contractor financing, and cash management tied 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 avoiding fiscal dominance, where governments pressure the CBN to print money for deficits, is key to successful inflation targeting. This applies to both federal and state governments.
Abdullahi outlined four responsibilities for states under the new framework: maintain fiscal discipline and predictability, borrow responsibly, improve coordination on cash and debt management, and strengthen internally generated revenue. He warned that excessive supplementary budgets, unplanned spending, and unsustainable debt could cause liquidity shocks and worsen inflation.
He stressed that inflation targeting is a collective national effort for long-term stability, economic credibility, and sustainable growth.
Dr Victor Oboh, Director of the Monetary Policy Department, called inflation targeting a “win-win framework” that benefits households, businesses, and governments. He said price stability cannot be achieved through monetary policy alone, especially in a federal system where state spending and borrowing affect inflation and liquidity.
Oboh said the meeting was meant to deepen collaboration between the CBN and state governments on expectations for inflation targeting.
Prof Olalekan Yunusa, speaking for the Nigerian Governors’ Forum, praised the CBN for involving states early in the process. He said the shift from monetary targeting to inflation targeting shows a deliberate commitment to price stability. He added that sustainable macroeconomic stability requires disciplined coordination across all government levels.
The meeting drew participants from over 20 states, including commissioners of finance, accountants-general, and other officials. They reaffirmed support for the CBN’s reform agenda.
Data from the Debt Management Office shows that the combined external debt of Nigeria’s 36 states and the Federal Capital Territory rose from $4.80 billion in December 2024 to $5.68 billion in December 2025. This is a net increase of $884.66 million, or 18.43 per cent year-on-year. Thirty-three out of 37 sub-national entities recorded higher external debt, while only four saw declines. The figures highlight continued reliance on external borrowing by states despite rising FAAC revenues.