The Central Bank of Nigeria (CBN) has urged state governments to scale back reliance on overdrafts and short-term borrowing, warning that weak fiscal discipline at the sub-national level could undermine efforts to stabilise inflation under the country’s emerging inflation-targeting framework.
The advisory was issued on Sunday by the Deputy Governor, Economic Policy Directorate, Dr Muhammad Abdullahi, during an engagement with sub-national stakeholders organised through the Nigerian Governors Forum (NGF) Secretariat.
Abdullahi urged states to ensure that borrowing decisions remain within debt sustainability limits, improve the realism of budgets and revenue projections, prioritise spending, and better align fiscal calendars with prevailing macroeconomic conditions.
He stressed that state governments have a critical role to play in the success of Nigeria’s transition to an Inflation Targeting (IT) monetary policy framework, noting that sustained price stability requires coordinated fiscal discipline across all tiers of government.
According to him, the shift to inflation targeting represents a move towards a more rule-based, transparent and forward-looking monetary regime, one that depends heavily on cooperation between monetary and fiscal authorities.
While the CBN is responsible for using monetary policy tools to control inflation, Abdullahi said fiscal decisions — particularly at the state level — significantly influence inflation dynamics in a federal system like Nigeria.
He explained that inflation targeting is largely about managing expectations, warning that uncoordinated or expansionary spending by states could weaken or even neutralise monetary policy efforts.
He identified several channels through which states affect inflation, including borrowing patterns, rising domestic debt, wage bills, capital expenditure execution, salary arrears, overdrafts, contractor financing obligations, and weak coordination in the management of FAAC inflows, cash flow and debt servicing.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” he said.
Abdullahi further noted that avoiding “fiscal dominance” — where government borrowing pressures force monetary financing of deficits — is essential for the success of the framework, stressing that this discipline must apply equally to state governments.
He reiterated his call for states to reduce overdraft dependence, strengthen debt sustainability practices, enhance budget credibility, improve revenue forecasting, prioritise expenditure, and align fiscal operations with macroeconomic realities.
He outlined four key responsibilities for state governments under the inflation-targeting regime: maintaining fiscal discipline and predictability; pursuing responsible borrowing within medium-term frameworks; strengthening cash and debt management coordination; and improving internally generated revenue mobilisation.
He warned that unplanned spending, excessive supplementary budgets, and unsustainable debt accumulation could trigger liquidity pressures and worsen inflation.
“Inflation targeting is a collective national commitment to stability, credibility and long-term prosperity,” he added, stressing that success depends on disciplined fiscal behaviour across all levels of government.
Earlier, the Director of Monetary Policy Department, Dr Victor Oboh, described inflation targeting as a “win-win framework” that anchors inflation expectations, strengthens policy credibility and reduces macroeconomic uncertainty for households, businesses and government.
He said price stability cannot be achieved through monetary policy alone, particularly in a federal system where sub-national fiscal actions significantly influence liquidity and inflation outcomes.
Oboh explained that the engagement was designed to deepen collaboration, improve mutual understanding and clarify coordination mechanisms required for the successful implementation of inflation targeting.
He also highlighted the role of state governments in shaping aggregate demand through wage decisions, capital spending, borrowing and revenue mobilisation.
In his goodwill message on behalf of the Director-General of the NGF, Dr Abdullateef Shittu, the Executive Director of Policy, Strategy and Research, Prof Olalekan Yunusa, commended the CBN for what he described as the strategic foresight behind the initiative and its inclusive approach to sub-national engagement.
He noted that sustained macroeconomic stability requires disciplined coordination across all tiers of government and cannot be achieved through monetary policy alone.
The session featured a detailed presentation on Nigeria’s transition to inflation targeting, with participants drawn from more than 20 states — including commissioners of finance, accountant generals, permanent secretaries, statisticians-general and other senior officials — expressing support for the reform and pledging cooperation with the CBN’s policy direction.
