CBN urges states to reduce reliance on overdrafts

The Central Bank of Nigeria (CBN) has urged state governments to reduce their reliance on overdrafts and short-term financing. A statement released by the apex bank on Sunday indicated that this recommendation was made by its Deputy Governor overseeing the Economic Policy Directorate, Dr. Muhammad Abdullahi, during a discussion with sub-national stakeholders, organized through the Nigerian Governors Forum Secretariat.

Abdullahi recommended that they ensure their borrowing decisions are in line with debt sustainability thresholds, enhance budget realism and revenue forecasting, prioritize expenditures, and better align fiscal calendars with current macroeconomic conditions. He highlighted the essential role of State Governments in facilitating a successful transition to an Inflation Targeting (IT) monetary policy framework, emphasizing that sustained price stability can only be achieved through coordinated fiscal discipline across all levels of government.

Abdullahi characterized the transition to inflation targeting as a move towards a more rule-based, transparent, and forward-looking monetary framework that requires close cooperation with state authorities. He stated that while the CBN is responsible for utilizing monetary policy tools to manage inflation, fiscal measures, especially at the sub-national level, significantly influence inflation outcomes within a federal system like Nigeria’s.

Dr. Abdullahi elaborated that inflation targeting fundamentally involves managing expectations, cautioning that uncoordinated or expansionary fiscal measures by State Governments could either strengthen or weaken monetary policy signals. He pointed out that States affect inflation through various channels, including borrowing choices, domestic debt accumulation, spending patterns, wage bills, execution of capital projects, salary arrears, overdrafts, contractor financing, and inadequate coordination regarding the Federation Account Allocation Committee (FAAC) receipts, cash management, and debt servicing.

“In an inflation targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub national level can significantly undermine price stability,” he said. The Deputy Governor emphasised that the absence of fiscal dominance, where government borrowing pressures compel the bank to monetise deficits, is a core prerequisite for successful inflation targeting.