The Central Bank of Nigeria (CBN) has urged state governments to reduce their dependence on overdrafts and short-term borrowing, warning that poor fiscal behaviour at the sub-national level could undermine the planned transition to an inflation-targeting monetary policy framework.

The apex bank gave the warning in a statement issued after an engagement with sub-national stakeholders organised through the Secretariat of the Nigerian Governors’ Forum (NGF) in Abuja.

The CBN Deputy Governor in charge of the Economic Policy Directorate, Muhammad Abdullahi, said state governments must embrace stronger fiscal discipline to support price stability and ongoing macroeconomic reforms.

Abdullahi reportedly 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, prioritise expenditure and synchronise fiscal calendars with prevailing macroeconomic conditions”.

He described the shift to inflation targeting as a more transparent and forward-looking monetary framework that would require close coordination between the CBN and state governments.

Abdullahi noted that while the apex bank is responsible for monetary policy decisions aimed at controlling inflation, fiscal actions by state governments play a major role in determining inflation outcomes in a federal system such as Nigeria.

He warned that inflation targeting depends heavily on managing economic expectations, stressing that expansionary spending by states could reduce the effectiveness of monetary policy measures.

According to him, state governments influence inflation through their borrowing patterns, debt accumulation, spending decisions, wage bills, project execution, salary arrears, contractor financing, and cash management practices tied to Federation Account Allocation Committee allocations (FAAC).

“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” Abdullahi said.

He added that avoiding fiscal dominance, where governments pressure the Central Bank to finance deficits, remains one of the key conditions for successful inflation targeting, noting that the principle applies with both the federal and state governments.

The deputy governor also outlined key responsibilities expected from states under the framework, including maintaining fiscal discipline and predictability, pursuing responsible borrowing, improving coordination on cash and debt management and strengthening internally generated revenue (IGR).

Meanwhile, the apex bank said it is leveraging governance, regulatory clarity and risk management in the non-interest financial services industry to sustain public confidence, financial stability and the orderly growth of non-interest banking.

The apex bank stated this during the 2nd Annual Interactive Session between the CBN Financial Regulation Advisory Council of Experts (FRACE) and the Advisory Committees of Experts (ACE) of Non-Interest Financial Institutions (NIFIs), held in Shia.

In an address delivered on behalf of the Deputy Governor, Financial System Stability, Philip Ikeazor, the Director of the Financial Policy and Regulation Department, Dr Rita Ijeoma Sike, described the session as a strategic platform for strengthening the credibility, resilience and soundness of the non-interest financial services industry.

Ikeazor said the engagement built on the foundation laid during the inaugural session and reinforces the CBN’s commitment to sustaining a sound, credible and resilient non-interest financial system anchored on strong governance, effective compliance and prudent risk management.

He noted that NIFIs continue to play an increasingly strategic role in Nigeria’s financial system by providing ethical and Shariah-compliant alternatives to conventional finance while contributing to financial inclusion, real sector financing, MSME development and shared prosperity.

However, as the industry grows, sophistication and interconnectedness, it also faces unique risks, including non-compliance, governance challenges, operational vulnerabilities and emerging technological threats.

The deputy governor warned that if not properly managed, the risks could undermine public confidence, financial stability and the credibility of the non-interest finance ecosystem.