CBN Issues Stern Warning to State Governments: Stop the Short-Term Borrowing Spree or Risk Crashing Nigeria’s Inflation-Targeting Dream

In a firm and timely intervention, the Central Bank of Nigeria (CBN) has cautioned state governments across the federation against their growing dependence on short-term borrowing and costly overdrafts.

The apex bank warned that continued reckless fiscal behaviour at the sub-national level could seriously undermine Nigeria’s planned transition to an inflation-targeting monetary policy framework a move widely seen as critical for long-term economic stability.

The warning was contained in a statement issued by the CBN on Sunday, following a high-level engagement with sub-national stakeholders facilitated through the Nigeria Governors’ Forum (NGF) Secretariat. The meeting brought together top fiscal officials from over 20 states, including commissioners of finance, accountants-general, permanent secretaries, and statisticians.

Speaking at the event, the Deputy Governor in charge of Economic Policy, Dr. Muhammad Sani Abdullahi, made it clear that the success of inflation targeting depends heavily on stronger fiscal coordination between the federal and state governments.

He warned that excessive reliance on overdrafts, frequent supplementary budgets, and unsustainable debt accumulation could weaken monetary policy signals and worsen inflationary pressures across the economy.

Abdullahi urged state governments to align their borrowing activities with clearly defined debt sustainability thresholds, improve the realism of their revenue forecasts, prioritize essential expenditures, and better synchronize their fiscal calendars with prevailing macroeconomic realities.

He emphasized that the principle of avoiding "fiscal dominance" where government borrowing pressures compel the central bank to monetize deficits applies not only at the federal level but equally to state governments.

The CBN deputy governor further noted that while the central bank controls monetary policy tools, state governments indirectly influence inflation through their borrowing decisions, debt accumulation patterns, expenditure habits, wage obligations, salary arrears, and contractor financing arrangements. He described inflation targeting as a "collective national commitment" that demands disciplined fiscal conduct from all tiers of government to achieve long-term macroeconomic stability, growth, and job creation.

Earlier, the Director of Monetary Policy at the CBN, Dr. Victor Oboh, described inflation targeting as a "win-win framework" capable of reducing macroeconomic uncertainty and improving policy credibility. He stressed that price stability cannot be achieved through monetary policy alone especially in a federal system where state spending, wage policies, and debt accumulation directly affect liquidity and inflation trends.

Supporting the CBN’s stance, the Executive Director of Policy, Strategy and Research at the NGF, Prof. Olalekan Yunusa, commended the apex bank for bringing sub-national fiscal authorities into the transition process early. He affirmed that sustainable macroeconomic stability can only be achieved through disciplined coordination among all levels of government.

The urgency of the CBN’s warning is further underscored by recent data from the Debt Management Office (DMO), which revealed that external debt owed by 32 Nigerian states and the Federal Capital Territory (FCT) rose by a combined $944.12 million in 2025. Total external debt stock increased from $4.80 billion in December 2024 to $5.68 billion by December 2025 a net rise of 18.43% year-on-year.

Four states recorded a slight decline of $59.46 million, which only partially offset the sharp increases seen elsewhere.

Participants at the engagement pledged their support for the CBN’s reform agenda, signaling a growing recognition that fiscal discipline at the state level is no longer optional but essential for Nigeria’s economic future