CBN Urges Nigerian States to Curb Overdrafts, Short-Term Financing for Price Stability
The Central Bank of Nigeria (CBN) has urged state governments to cut down on overdrafts and short-term financing to align with debt sustainability thresholds and improve budget realism, revenue forecasting, and expenditure prioritization.
Speaking during an engagement with sub-national stakeholders, Dr. Muhammad Abdullahi, the Deputy Governor in charge of the Economic Policy Directorate at the CBN, emphasized the critical role of state governments in ensuring a successful transition to an Inflation Targeting (IT) monetary policy framework. He stressed that sustained price stability can be achieved only through coordinated fiscal discipline across all tiers of government.
Key Takeaways
- CBN advises state governments to reduce reliance on overdrafts and short-term financing
- State borrowing decisions should align with debt sustainability thresholds
- Improved budget realism and revenue forecasting are crucial
- Fiscal discipline and predictability are essential for price stability
- Sub-national governments play a pivotal role in macroeconomic stability
Dr. Abdullahi described the move towards inflation targeting as a shift to a more rule-based, transparent, and forward-looking monetary framework that demands close collaboration with state authorities. He explained that while the CBN retains responsibility for deploying monetary policy tools to control inflation, fiscal actions, particularly at the sub-national level, play a significant role in shaping inflation outcomes within a federal system such as Nigeria’s.
The Deputy Governor emphasized that uncoordinated or expansionary fiscal actions by State Governments could either reinforce or undermine monetary policy signals. He noted that States influence inflation through multiple channels, including borrowing decisions, domestic debt accumulation, expenditure patterns, wage bills, capital project execution, salary arrears, overdrafts, contractor financing, and weak coordination on the Federation Account Allocation Committee (FAAC) receipts, cash management, and debt servicing.
Under the inflation-targeting framework, Dr. Abdullahi outlined four key responsibilities for State Governments: maintaining fiscal discipline and predictability; pursuing responsible borrowing aligned with medium-term fiscal frameworks; strengthening coordination on cash and debt management; and enhancing internally generated revenue mobilisation.
Earlier, in his opening remarks, the Director, Monetary Policy Department, Dr. Victor Oboh, described inflation targeting as a ‘win-win framework’ that benefits households, businesses, and governments by anchoring inflation expectations, enhancing policy credibility, and reducing macroeconomic uncertainty.
He stressed that price stability cannot be achieved through monetary policy alone, particularly in a federal system, noting that sub-national fiscal operations, especially spending, borrowing, and cash-flow decisions, have direct implications for liquidity conditions and inflation outcomes.
The engagement featured a detailed presentation on Nigeria’s transition to inflation targeting. Participants drawn from over 20 states of the Federation, comprising Commissioners of Finance and Economic Planning, Accountant Generals, Permanent Secretaries, State Statistician-Generals and Directors, amongst others, commended the CBN’s reform agenda, particularly the transition to inflation targeting, and reaffirmed their commitment to supporting the Bank’s efforts.
Why This Matters
The CBN’s call for state governments to curb overdrafts and short-term financing is crucial for ensuring fiscal discipline and promoting price stability in Nigeria. By strengthening coordination and embedding macroeconomic stability as a collective national objective, this move aims to benefit households, businesses, and governments alike by reducing macroeconomic uncertainty and enhancing policy credibility.