May 11, (THEWILL) — The Central Bank of Nigeria has warned State Governments against excessive borrowing, deficit spending, and poor fiscal coordination, saying such practices could undermine Nigeria’s planned transition to an inflation-targeting (IT) monetary policy framework aimed at achieving long-term price stability and macroeconomic stability.
The apex bank stressed that disciplined fiscal behaviour by sub-national governments would be critical to the success of the proposed framework, noting that inflation control cannot be achieved through monetary policy measures alone in a federal system such as Nigeria’s.
Speaking during an engagement with sub-national stakeholders facilitated through the Secretariat of the Nigeria Governors’ Forum, the Deputy Governor in charge of the Economic Policy Directorate at the CBN, Muhammad Sani Abdullahi, described the transition to inflation targeting as a major shift toward a more transparent, rule-based, and forward-looking monetary policy system.
According to him, inflation targeting focuses strongly on managing expectations and strengthening policy credibility, making close coordination between fiscal and monetary authorities indispensable.
Abdullahi explained that although the responsibility for controlling inflation through monetary policy rests with the Central Bank, fiscal actions at the state level significantly shape inflation outcomes and liquidity conditions within the economy.
He noted that State Governments influence inflation through multiple channels, including borrowing decisions, domestic debt accumulation, recurrent expenditure patterns, wage obligations, implementation of capital projects, salary arrears, contractor financing arrangements, overdrafts, and management of Federation Account Allocation Committee (FAAC) receipts and debt servicing obligations.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” the Deputy Governor warned.
He further stressed that the absence of fiscal dominance remains a key requirement for successful inflation targeting, explaining that excessive government borrowing pressures could force the Central Bank to monetise deficits, thereby weakening monetary policy effectiveness and fueling inflationary pressures.
According to him, the principle applies not only to the Federal Government but equally to State Governments whose collective fiscal operations affect national macroeconomic outcomes.
Abdullahi therefore urged States to reduce reliance on overdrafts and short-term financing arrangements, warning that such practices expose public finances to instability and liquidity shocks.
He also called on State Governments to ensure that borrowing decisions remain within sustainable debt thresholds and align with medium-term fiscal frameworks capable of supporting long-term economic stability.
The Deputy Governor advised States to improve budget realism and revenue forecasting, prioritise expenditure, and synchronise fiscal calendars with prevailing macroeconomic realities to minimise financing gaps and avoid unplanned expenditures that could intensify inflationary pressures.
He identified four major responsibilities expected from State Governments under the inflation-targeting framework. These include maintaining fiscal discipline and predictability, pursuing responsible borrowing policies, strengthening coordination on cash and debt management, and improving internally generated revenue mobilisation.
Abdullahi cautioned that excessive supplementary budgets, unsustainable debt accumulation, and poorly coordinated fiscal operations could trigger liquidity pressures capable of weakening the impact of monetary policy interventions.
He reiterated that inflation targeting should be viewed as a collective national responsibility rather than the sole obligation of the Central Bank, stressing that coordinated fiscal discipline across all tiers of government would be necessary to ensure price stability, investor confidence, and sustainable economic growth.
According to him, stronger cooperation between fiscal and monetary authorities would help create a stable macroeconomic environment capable of supporting job creation, investment expansion, and improved social welfare outcomes.
Earlier in his opening remarks, the Director of the Monetary Policy Department at the CBN, Victor Oboh, described inflation targeting as a “win-win framework” that would benefit households, businesses, and governments by reducing macroeconomic uncertainty and strengthening policy credibility.
He stressed that price stability cannot be achieved through monetary policy actions alone, particularly in a federal system where fiscal operations by State Governments directly affect liquidity conditions and aggregate demand.
Oboh explained that spending decisions, wage policies, debt accumulation, and cash-flow management at the state level all influence inflation dynamics and the effectiveness of monetary policy.
According to him, the engagement with State officials was organised to deepen mutual understanding, promote dialogue, and strengthen collaboration between the Central Bank and sub-national governments regarding the coordination mechanisms required for the success of inflation targeting.
He further noted that State Governments occupy a strategic position in Nigeria’s macroeconomic structure because their fiscal activities directly shape economic activity and inflation trends nationwide.
The Director reaffirmed that the engagement forms part of the broader partnership between the Central Bank and the Nigeria Governors’ Forum aimed at embedding macroeconomic stability as a shared national objective.
Delivering a goodwill message on behalf of the Director-General of the NGF, the Executive Director for Policy, Strategy and Research at the Forum, Prof. Olalekan Yunusa, commended the leadership of the Central Bank for involving State Governments early in the transition process.
Prof. Yunusa said the planned shift from monetary targeting to inflation targeting reflects Nigeria’s commitment to making price stability the central anchor of economic policy.
He added that sustainable macroeconomic stability cannot be achieved solely through monetary interventions but requires disciplined fiscal coordination across all tiers of government.
According to him, stronger collaboration between the Central Bank and State Governments would improve fiscal transparency, strengthen policy alignment, and support efforts to manage inflation expectations effectively.
The engagement also featured detailed presentations on Nigeria’s transition strategy toward inflation targeting, including the institutional requirements, operational framework, and policy coordination mechanisms necessary for implementation.
Participants at the session were drawn from more than 20 states of the federation and included Commissioners for Finance and Economic Planning, Accountant-Generals, Permanent Secretaries, State Statistician-Generals, Directors, and other senior fiscal and economic management officials.
The participants commended the CBN’s reform agenda, particularly the transition toward inflation targeting, and pledged support for the successful implementation of the framework across the federation.
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