The Central Bank of Nigeria has warned that careless fiscal behavior at the sub-national level could jeopardize the nation’s shift to an inflation-targeting monetary policy framework and has urged state governments to lessen their reliance on overdrafts and short-term borrowing.
Following a meeting with subnational stakeholders facilitated by the Nigerian Governors’ Forum Secretariat in Abuja, the CBN made this announcement in a press release on Sunday.
Dr. Muhammad Abdullahi, the deputy governor in charge of the Economic Policy Directorate, stated in the statement that in order to support price stability and continuing macroeconomic reforms, state governments must implement more stringent fiscal discipline.
According to the statement, “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, prioritize expenditure, and better synchronize fiscal calendars with prevailing macroeconomic conditions.”
According to Abdullahi, the shift to inflation targeting necessitates close cooperation between the central bank and state authorities in order to create a more transparent, rule-based, and forward-looking monetary framework.
He claims that in a federal system like Nigeria’s, state governments’ fiscal policies have a major impact on inflation outcomes even though the CBN is still in charge of monetary policy decisions meant to control inflation.
He cautioned that controlling economic expectations is a major component of inflation targeting, emphasizing that states’ expansionary fiscal actions could reduce the impact of monetary policy signals.
The deputy governor pointed out that borrowing choices, debt accumulation, spending habits, wage bills, capital project execution, salary arrears, contractor financing, and cash management procedures connected to Federation Account Allocation Committee receipts are all ways that state governments affect inflation.
“Persistent, unpredictable, or expansionary fiscal behavior at the subnational level can significantly undermine price stability in an inflation-targeting regime,” Abdullahi stated.
The absence of fiscal dominance, in which governments exert pressure on the central bank to monetize deficits, is still a crucial prerequisite for effective inflation targeting, he continued, pointing out that this principle holds true for both federal and state governments.
Abdullahi went on to list four duties that state governments are expected to fulfill under the inflation-targeting framework. These duties include upholding fiscal predictability and discipline, pursuing responsible borrowing, enhancing coordination on cash and debt management, and bolstering internally generated revenue mobilization.
He cautioned that unplanned spending, excessive supplemental budgets, and unsustainable debt accumulation could exacerbate inflationary pressures and cause liquidity shocks. He emphasized the importance of maintaining a balanced approach to fiscal policies, urging state governments to implement strategies that promote long-term economic stability. Additionally, he pointed out that effective communication and transparency in financial reporting are crucial for building public trust and ensuring accountability in governance.
In order to achieve long-term stability, economic credibility, and sustainable growth, the deputy governor emphasized that inflation targeting should be viewed as a national commitment.
Speaking as well, Dr. Victor Oboh, Director of the Monetary Policy Department, defined inflation targeting as a “win-win framework” that can help governments, corporations, and households by lowering macroeconomic uncertainty and enhancing policy credibility. He further elaborated that this approach not only stabilizes prices but also fosters an environment conducive to investment and economic development. By aligning monetary policy with clear targets, stakeholders can better anticipate changes and make informed decisions that support overall economic health.
Oboh explained that because Nigeria operates a federal system, economic coordination between the federal government and the states is critical if inflation targeting policies are expected to succeed. He noted that without discipline in state-level spending and borrowing, efforts by the apex bank to control rising prices may face serious limitations.
The meeting, which brought together officials from over 20 states, was organized to strengthen collaboration between the CBN and subnational governments as Nigeria gradually transitions from monetary targeting to inflation targeting — a strategy many economists believe could improve long-term price stability if properly implemented.
Delivering a goodwill message on behalf of the Director-General of the Nigerian Governors’ Forum, Dr. Abdullateef Shittu, the Executive Director of Policy, Strategy and Research at the forum, Prof. Olalekan Yunusa, praised the CBN for involving state governments early in the transition process.
According to Yunusa, sustainable economic stability cannot be achieved unless all levels of government work together responsibly. He described the shift toward inflation targeting as a deliberate attempt to strengthen confidence in Nigeria’s economy while improving long-term financial management.
Participants at the engagement included commissioners of finance, economic planning officials, accountants-general, permanent secretaries, statisticians-general, and directors from various states. Many reportedly expressed support for the CBN’s reform agenda while acknowledging the need for stronger fiscal discipline nationwide.
However, the discussions come at a time when Nigeria’s growing state debt burden is attracting increased public attention.
Recent data released by the Debt Management Office revealed that the combined external debt of Nigeria’s 36 states and the Federal Capital Territory increased significantly in 2025. According to the figures, subnational external debt rose from approximately $4.80 billion at the end of 2024 to about $5.68 billion by the end of 2025.
The increase represents a fresh borrowing surge of nearly $884.66 million within one year — a rise of more than 18 percent despite increased allocations from the Federation Account Allocation Committee.
Economic analysts say the development raises important questions about fiscal sustainability at the state level. While some governors argue that external loans are necessary to fund infrastructure and development projects, critics warn that excessive borrowing could create long-term financial pressure for future administrations.
Many Nigerians are also concerned about how borrowed funds are being utilized. Across social media, citizens continue demanding greater transparency, accountability, and visible development projects tied to state loans.
The rising debt profile has also intensified conversations around inflation and economic hardship. With food prices, transportation costs, and living expenses continuing to rise across the country, many citizens fear that poor fiscal management at both federal and state levels may worsen economic pressure on ordinary Nigerians.
Experts believe that for inflation targeting to succeed, state governments may need to adopt stricter spending controls, improve internally generated revenue, and reduce unnecessary borrowing. Economists also argue that coordination between fiscal and monetary authorities will become increasingly important as Nigeria attempts to stabilize its economy.
As the CBN continues pushing reforms aimed at controlling inflation and restoring economic confidence, many observers say the coming years will test whether Nigeria’s federal and state institutions can truly work together effectively in managing the country’s economic future.
According to recent debt data, 33 out of the 37 subnational entities — including the Federal Capital Territory — recorded increases in their external debt profiles during the review period. This represents nearly 90 per cent of all states, while only four states managed to reduce their debt levels.
The sharp rise highlights the increasing reliance of many state governments on external financing as they struggle with mounting fiscal pressures, infrastructure demands, and rising governance costs.
Economic analysts say the trend reflects the difficult financial reality facing many state administrations. Despite increased FAAC disbursements following recent economic reforms, several governors continue borrowing heavily to fund projects, pay salaries, and manage public services.
Experts believe many states are under pressure to improve roads, healthcare systems, education infrastructure, and urban development projects, forcing governments to seek additional financing from international lenders and development institutions.
However, the growing debt profile has triggered debates among economists and financial experts who warn that excessive borrowing may expose states to future repayment challenges, especially if revenues fail to improve significantly.
Critics also argue that while borrowing itself is not necessarily negative, transparency and accountability remain major concerns. Many Nigerians continue questioning whether loans obtained by state governments are translating into visible development and economic improvement for citizens.
The issue has become even more sensitive due to the country’s current economic situation. Rising inflation, high transportation costs, increasing food prices, and growing unemployment have already placed pressure on millions of households nationwide.
Some financial analysts warn that if states continue depending heavily on loans without expanding internally generated revenue, future administrations could inherit severe debt burdens capable of affecting development for years.
Meanwhile, supporters of external borrowing argue that loans remain necessary for infrastructure growth and long-term development, especially in states struggling with weak local revenue generation. They insist that strategic borrowing can stimulate economic activity if funds are properly utilized.
The figures have also intensified conversations around fiscal discipline and economic management at the subnational level. Economists believe states may need to adopt stricter spending controls, reduce wasteful expenditures, and prioritize projects with direct economic impact.
Observers note that Nigeria’s growing debt conversations are no longer limited to the federal government alone. Increasingly, attention is shifting toward how state governments manage public funds, execute projects, and balance development ambitions with financial sustainability.
As Nigeria continues navigating economic reforms and inflation challenges, many citizens are watching closely to see whether rising debts across states will eventually translate into meaningful development or become another long-term burden on the economy.
