Apex bank says excessive borrowing and poor fiscal discipline by state governments could derail Nigeria’s fight against inflation…..
The Central Bank of Nigeria has issued a strong warning to state governments over growing dependence on overdrafts, short-term loans, and unsustainable borrowing, cautioning that poor fiscal discipline at the sub-national level could threaten Nigeria’s planned transition to an inflation-targeting economy.
The warning was contained in a statement released on Sunday after a high-level engagement between the apex bank and state officials held through the Nigerian Governors’ Forum Secretariat in Abuja.
Speaking during the session, the Deputy Governor overseeing the Economic Policy Directorate, Dr Muhammad Abdullahi, urged state governments to embrace prudent financial management and align their fiscal activities with broader economic reforms aimed at stabilising prices and restoring investor confidence.
According to Abdullahi, state authorities must move away from excessive dependence on overdrafts and short-term financing arrangements, warning that unchecked borrowing and unpredictable spending patterns could weaken the effectiveness of monetary policy measures introduced by the central bank.
“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 noted.
The CBN official explained that Nigeria’s proposed inflation-targeting framework represents a major shift toward a more transparent and forward-looking monetary policy system, one that depends heavily on coordination between the federal government, the apex bank, and state authorities.
He stressed that while the CBN is responsible for controlling inflation through monetary policy, actions taken by state governments also directly influence inflation trends across the country.
Abdullahi warned that expansionary spending, rising debt levels, delayed salary payments, and poorly managed capital projects at the state level could undermine efforts to maintain price stability.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” he said.
He further explained that inflation targeting works largely by shaping public expectations, meaning reckless fiscal conduct by governments could weaken confidence in the broader economic reform programme.
The deputy governor also highlighted concerns over what economists describe as “fiscal dominance,” where governments pressure central banks into financing deficits through monetary expansion, a situation he said poses serious risks to inflation control.
According to him, the principle applies not only to the federal government but also to state governments whose borrowing and spending decisions influence liquidity conditions nationwide.
Abdullahi outlined four key responsibilities expected from states under the proposed framework, including maintaining fiscal discipline, adopting responsible borrowing practices, improving coordination on debt and cash management, and strengthening internally generated revenue.
He warned that excessive supplementary budgets, unplanned expenditures, and uncontrolled debt accumulation could trigger fresh liquidity shocks and worsen inflationary pressures across the economy.
Also speaking at the engagement, the Director of the Monetary Policy Department at the CBN, Victor Oboh, described inflation targeting as a “win-win framework” capable of boosting policy credibility, reducing uncertainty, and improving economic stability for households, businesses, and governments.
Oboh noted that price stability cannot be achieved through monetary policy alone, particularly in a federal system where state governments significantly influence economic activity through their spending and borrowing decisions.
He said the engagement was organised to deepen collaboration between the CBN and state governments ahead of the full implementation of the inflation-targeting framework.
Representing the Director-General of the Nigerian Governors’ Forum, Prof Olalekan Yunusa commended the apex bank for involving states early in the transition process.
According to him, achieving lasting macroeconomic stability would require strong coordination and fiscal discipline across all levels of government.
The meeting attracted officials from more than 20 states, including commissioners for finance and economic planning, accountants-general, permanent secretaries, statisticians-general, and senior directors, many of whom pledged support for the CBN’s reform agenda.
The warning from the apex bank comes amid rising concerns over Nigeria’s growing sub-national debt profile.
Recent figures released by the Debt Management Office showed that the combined external debt of the 36 states and the Federal Capital Territory rose sharply from $4.80bn at the end of 2024 to $5.68bn by December 2025.
The increase represents a fresh $884.66m jump in external debt within one year an 18.43 percent rise despite improved allocations from the Federation Account Allocation Committee.
Data from the DMO further revealed that 33 out of Nigeria’s 37 sub-national entities recorded increases in their external debt stock during the period under review, highlighting continued dependence on borrowing to fund infrastructure projects and manage mounting fiscal pressures.
