CBN pushes states to cut reliance on overdrafts

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

The warning was contained in a statement issued by the apex bank on Sunday after an engagement with state officials facilitated through the Nigeria Governors’ Forum Secretariat in Abuja.

Speaking during the engagement, the Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, said state governments must adopt stricter fiscal discipline to support macroeconomic stability and ongoing reforms.

“He urged states to reduce reliance on overdrafts and short-term financing, ensure borrowing decisions align with debt sustainability thresholds, improve budget realism and revenue forecasting,” the statement said.

Dr Abdullahi explained that the shift to inflation targeting represents a more transparent and forward-looking monetary policy framework that requires stronger cooperation between the CBN and state governments.

Inflation risks from state spending

According to the deputy governor, state fiscal behaviour directly affects inflation outcomes in Nigeria’s federal system.

“In an inflation targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” he said.

Dr Abdullahi warned that excessive borrowing, supplementary budgets, salary arrears, contractor financing, and poor cash management could weaken the effectiveness of monetary policy signals.

Nigeria is currently pursuing macroeconomic reforms aimed at stabilising inflation, strengthening investor confidence, and improving fiscal coordination across all tiers of government.

Responsibilities for state governments

The CBN outlined four key expectations for state governments under the inflation-targeting framework:

• Maintaining fiscal discipline and predictability
• Pursuing responsible borrowing
• Improving coordination on debt and cash management
• Strengthening internally generated revenue

The apex bank stressed that inflation targeting requires collective national discipline and not just monetary interventions from the central bank alone.

Monetary policy department speaks

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

Dr Oboh noted that price stability cannot be achieved solely through monetary policy because state spending and borrowing decisions also influence inflation and liquidity levels nationwide.

Representing the Director-General of the Nigeria Governors’ Forum, Olalekan Yunusa commended the CBN for involving state governments early in the reform process.

He said sustainable economic stability requires disciplined coordination across all levels of government.

The meeting attracted officials from more than 20 states, including commissioners of finance, accountants-general, permanent secretaries, and economic planners.

Rising state debt raises concern

The development comes amid rising concern over the growing debt profile of Nigerian states.

Recent figures from the Debt Management Office showed that the combined external debt of the 36 states and the Federal Capital Territory rose from $4.80 billion on 31 December 2024 to $5.68 billion by 31 December 2025 — an increase of $884.66 million.

Data further showed that 33 states recorded increases in external debt during the period, highlighting continued dependence on borrowing despite higher allocations from the Federation Account Allocation Committee.

Analysts say the rising debt burden could complicate efforts to tame inflation and maintain fiscal stability if spending patterns remain unchecked.