Central Bank of Nigeria Calls for Fiscal Discipline Among States
The Central Bank of Nigeria (CBN) is urging state governments to minimize their dependence on overdrafts and short-term borrowing. Officials warn that imprudent fiscal practices at the local level could jeopardize Nigeria’s adoption of an inflation-targeting monetary policy framework.
This announcement was made in a press release issued by the CBN following discussions with sub-national stakeholders, facilitated by the Nigeria Governors Forum Secretariat in Abuja.
Dr. Muhammad Abdullahi, Deputy Governor of the Directorate General of Economic Policy, emphasized the need for state governments to implement stricter fiscal discipline. He suggested that such measures are essential for supporting price stability and ongoing macroeconomic reforms.
He stated, “We called on states to reduce reliance on overdrafts and short-term loans, align borrowing decisions with debt sustainability criteria, improve budget realism and revenue projections, prioritize expenditure, and effectively align fiscal calendars with prevailing macroeconomic conditions.”
Abdullahi clarified that the transition to an inflation-targeting framework marks a shift towards a more transparent, rules-based, and forward-looking economic landscape that necessitates close collaboration between the central bank and state authorities.
While the CBN is primarily responsible for monetary policy aimed at controlling inflation, Abdullahi noted that fiscal measures taken by state governments also significantly influence inflation outcomes in a federal system like Nigeria.
He cautioned that inflation targeting heavily relies on managing economic expectations, highlighting that expansionary fiscal activities could dilute the effectiveness of monetary policy signals. The Deputy Governor further pointed out that state governments contribute to inflation through their borrowing habits, debt accumulation, expenditure patterns, wage commitments, execution of capital projects, and cash management linked to Federal Account Allocation Board receipts.
Under inflation-targeting strategies, unpredictable and expansionary fiscal actions at the local level can fundamentally threaten price stability. He also remarked that the absence of a “fiscal advantage”—the ability of governments to pressure central banks into monetizing deficits—remains a critical requirement for successful inflation targeting, applicable at both federal and state levels.
Abdullahi outlined four key responsibilities for state governments under the inflation-targeting regime: maintaining fiscal discipline and predictability, engaging in responsible borrowing practices, improving coordination regarding cash and debt management, and enhancing the mobilization of domestically generated revenue.
He warned that excessive supplementary budgets and unsustainable debt accumulation could lead to liquidity shocks, further exacerbating inflationary pressures. The Vice Governor reiterated that inflation targeting should be viewed as a unified national commitment aimed at achieving long-term stability and sustainable growth.
Monetary Policy Director Dr. Victor Oboh highlighted that inflation targeting serves as a “win-win framework” benefiting households, businesses, and governments by fostering confidence in policy and reducing macroeconomic uncertainty. He stressed that monetary policy alone cannot ensure price stability, particularly in a federal system where spending, borrowing, and cash flow decisions are directly linked to inflation and liquidity conditions.
The initiative was designed to bolster cooperation and understanding between the CBN and state governments, clarifying the expectations and coordination required for effective implementation of inflation targets.
Delivering a goodwill message on behalf of Dr. Abdullatif Shittu, Executive Director of the Nigeria Governors Forum, Professor Olalekan Yunusa commended the CBN for involving sub-national authorities early in the transition process. He noted that this shift from monetary targeting to inflation targeting signifies a committed approach to price stability, reiterating that sustainable macroeconomic stability necessitates disciplined coordination across all government levels.
The meeting encompassed participants from over 20 states, including key officials such as Secretaries of Finance and Economic Planning and Directors-General. They reaffirmed their support for the CBN’s reform agenda and its transition to an inflation-targeting framework.
Recent reports indicated that the debt of 36 states and the Federal Capital Territory escalated to nearly $5.7 billion in new external loans by 2025, revealing a troubling trend of increased local external debt despite rising federal allocations. Data from the Debt Management Bureau showed that the combined external debt of the 36 states and FCT surged from $4.8 billion on December 31, 2024, to $5.68 billion a year later, marking an increase of approximately $884.66 million or 18.43% year-on-year.
According to the data breakdown, 33 out of 37 local entities reported growth in external debt during the surveyed period, accounting for 89.19% of the total. Only four provinces saw a decline, representing 10.81%. This significant uptick underscores state governments’ ongoing reliance on external funding amid mounting fiscal pressures, infrastructure needs, and increased revenues from federal allocations.
