The Central Bank of Nigeria (CBN) has urged state governments to curb their dependence on overdraft facilities and to strengthen fiscal discipline as part of the nation’s broader effort to contain inflation. In a circular addressed to all 36 states and the Federal Capital Territory, the CBN warned that excessive reliance on overdraft financing undermines prudent financial management and heightens fiscal vulnerability, especially as Nigeria grapples with a new inflation‑targeting framework.
The central bank’s directive, issued in early May, calls on state executives to review existing overdraft arrangements with commercial banks, limit the renewal of such facilities, and explore alternative revenue sources to bridge budgetary gaps. The CBN emphasised that while overdrafts can provide short‑term liquidity, they should not become a regular financing tool for recurring expenditures. “States must adopt sound budgeting practices, improve revenue mobilisation, and tighten expenditure controls,” the circular read.
The advisory follows a series of monetary‑policy adjustments aimed at stabilising price pressures. In February, the CBN raised the Monetary Policy Rate by 150 basis points to 24.75 per cent, signalling a resolve to rein in inflation that has hovered above 30 per cent for much of the year. By tightening overall liquidity and discouraging unsustainable borrowing, the central bank hopes to reinforce the credibility of Nigeria’s nascent inflation‑targeting regime, which seeks to anchor expectations and promote macro‑economic stability.
State officials have responded with cautious acceptance. Governors of several states, including Lagos, Kano and Rivers, indicated that they will audit their overdraft contracts and report progress to the CBN. In Lagos, the governor’s office highlighted ongoing reforms to broaden the tax base and improve internal revenue collection, measures that align with the central bank’s call for enhanced fiscal discipline. Similarly, the Kano State Ministry of Finance noted plans to phase out non‑essential overdraft usage and to prioritise capital projects financed through internally generated funds.
Financial analysts see the CBN’s move as a natural extension of its broader prudential agenda. “Reducing overdraft dependency is essential for limiting fiscal deficits at the sub‑national level, which, in turn, reduces pressure on the central bank’s monetary stance,” said a senior economist at a Lagos‑based consultancy. The analyst added that improved fiscal management at the state level could free up resources for critical infrastructure and social programmes without inflating the money supply.
The CBN’s guidance also underscores the importance of transparency and accountability in public finance. By urging states to disclose their overdraft arrangements and to submit regular compliance reports, the central bank aims to create a clearer picture of Nigeria’s overall debt exposure. This data will be vital for future policy decisions, especially as the government seeks to secure external financing and to meet the conditions of international lenders.
If states heed the CBN’s advice, Nigeria could see a modest decrease in aggregate public sector borrowing, easing pressure on the banking sector and contributing to a more stable inflation outlook. However, experts caution that the transition will require robust political will and capacity building at the sub‑national level. The central bank has pledged to support states with technical assistance and capacity‑building programmes to ensure the successful implementation of the reforms.
The CBN’s call comes at a critical juncture as the country navigates a fragile economic recovery post‑pandemic, heightened commodity price volatility, and a tightening global financial environment. By encouraging states to improve fiscal discipline and reduce overdraft reliance, the central bank aims to reinforce Nigeria’s macro‑economic foundation and sustain the momentum toward lower inflation and stronger growth.
