CBN Pushes States to Cut Overdraft Reliance

The Central Bank of Nigeria has ordered state governments to end their addiction to overdrafts and short-term loans. This fiscal recklessness now threatens the bank’s planned shift to a rule-based inflation-targeting framework. Deputy Governor Muhammad Abdullahi warned state officials on Sunday that expansionary spending at the sub-national level blunts the edge of monetary policy. States must now align their borrowing with strict debt sustainability limits or risk crashing the national economy. The message is simple: the era of easy money is over.

Nigeria’s transition to inflation targeting requires a world without “fiscal dominance.” This occurs when the central bank feels forced to print money to cover government deficits. While the federal government often takes the blame, state capitals are equally guilty of bloating the money supply. Persistent and unpredictable spending by governors creates liquidity shocks that drive up prices for everyone. The bank wants states to synchronise their fiscal calendars with national macroeconomic goals. Coordination is no longer optional in a federal system under strain.

The numbers suggest a deep-seated habit that will be hard to break. Fresh data from the Debt Management Office shows that state foreign debt hit $5.7 billion by the end of 2025. This represents an 18 per cent jump in a single year despite higher monthly payouts from the federation account. Thirty-three states grew their external debt stock even as revenues from Abuja increased. High receipts should lead to lower borrowing, but the opposite is happening. States are spending more than they earn and borrowing to fill the gap.

Governors influence inflation through more than just bank loans. Their wage bills, contractor payments, and cash management practices all dictate how much money stays in the pockets of citizens. Excessive supplementary budgets and unplanned projects create a wave of cash that the central bank must then fight to mop up. The bank now demands better revenue forecasting and more realistic budgets from state finance commissioners. They must stop treating the central bank as a lender of last resort for poor planning.

The central bank is also pushing states to grow their own internal tax bases. Relying on federal handouts and bank overdrafts makes states vulnerable to every dip in the oil market. Disciplined cash management would reduce the need for expensive short-term financing that eats into future budgets. Dr Victor Oboh of the Monetary Policy Department called the new framework a win-win for policy credibility. If states behave, interest rates and inflation might finally find a stable floor. If they do not, the entire reform programme could collapse.

Sub-national authorities claim they are ready to cooperate. The Nigeria Governors’ Forum has welcomed the early engagement as a sign of a more inclusive policy process. However, talk is cheap, and debt is expensive. Commissioners of finance from 20 states have pledged support, but the true test lies in the next budget cycle. Governors rarely enjoy the austerity that inflation targeting demands. They must now choose between building legacy projects on debt or securing the value of the naira.