CBN cautions states on debt, stresses fiscal prudence

The Central Bank of Nigeria (CBN) has cautioned state governments against excessive reliance on overdrafts and short-term borrowing, warning that weak fiscal discipline at the sub-national level could undermine Nigeria’s broader effort to stabilise inflation under a new monetary policy framework.

The warning followed a stakeholder engagement with state officials facilitated through the Nigerian Governors’ Forum Secretariat in Abuja, where the apex bank stressed the need for stronger coordination between monetary and fiscal authorities.

According to the CBN, states must begin to align borrowing decisions with debt sustainability limits, improve budget planning and revenue forecasting, and reduce dependence on short-term financing instruments that can destabilise macroeconomic conditions.

Dr Muhammad Abdullahi, Deputy Governor for Economic Policy, said inflation targeting requires a more disciplined and predictable fiscal environment, noting that state-level spending decisions play a direct role in shaping national inflation outcomes.

He explained that inflation control in a federal system like Nigeria cannot be achieved through monetary policy alone, as state governments influence liquidity conditions through borrowing patterns, wage bills, capital expenditure, and cash flow management linked to federal allocations.

Abdullahi warned that expansionary or uncoordinated fiscal behaviour by states could weaken the effectiveness of monetary policy and trigger inflationary pressures.

He further outlined key expectations for states under the inflation-targeting framework, including stricter fiscal discipline, responsible borrowing, improved debt management coordination, and stronger internally generated revenue efforts.

The CBN also cautioned that excessive supplementary budgets, unplanned spending, and rising debt accumulation could lead to liquidity shocks and worsen inflation.

Dr Victor Oboh, Director of the Monetary Policy Department, described the inflation-targeting framework as a “win-win” approach that could improve policy credibility, reduce uncertainty, and benefit households, businesses, and government alike.

He added that the success of the policy depends on cooperation across all tiers of government, especially in a system where state-level fiscal decisions significantly affect inflation dynamics.

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The Nigerian Governors’ Forum, through its representatives, commended the CBN for involving states early in the transition process and pledged support for the reform agenda.

Data referenced by the apex bank shows that state external debt rose sharply in 2025, with 33 of 37 subnational governments recording increases. Combined external debt for states and the Federal Capital Territory rose from $4.80 billion in 2024 to $5.68 billion in 2025, an increase of about $884 million.

The CBN said the trend reflects continued reliance on external borrowing amid fiscal pressures, infrastructure demands, and rising revenue inflows from the Federation Account.

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