The Central Bank of Nigeria (CBN) has urged state governments to decrease their reliance on overdraft facilities and enhance fiscal discipline as part of a national initiative to control inflation. In a circular addressed to all 36 states and the Federal Capital Territory, the CBN warned that excessive dependence on overdraft financing undermines prudent financial management and increases fiscal vulnerability, particularly as Nigeria implements a new inflation-targeting framework. Issued in early May, the central bank’s directive calls on state executives to review existing overdraft arrangements with commercial banks, limit the renewal of such facilities, and explore alternative revenue sources to address budgetary gaps.
The CBN emphasized that while overdrafts can provide short-term liquidity, they should not be used as a regular financing tool for recurring expenditures. The circular stated, “States must adopt sound budgeting practices, improve revenue mobilization, and tighten expenditure controls.” This advisory follows a series of monetary policy adjustments aimed at stabilizing price pressures. In February, the CBN raised the Monetary Policy Rate by 150 basis points to 24.75 percent, signaling its commitment to rein in inflation, which has remained above 30 percent for much of the year. By tightening overall liquidity and discouraging unsustainable borrowing, the central bank aims to enhance the credibility of Nigeria’s nascent inflation-targeting regime, which seeks to anchor expectations and promote macroeconomic stability.
State officials have responded with cautious acceptance of the CBN’s guidance. Governors from several states, including Lagos, Kano, and Rivers, have indicated plans to audit their overdraft contracts and report their progress to the CBN. The Lagos governor’s office has highlighted ongoing reforms aimed at broadening the tax base and improving internal revenue collection, aligning with the central bank’s call for enhanced fiscal discipline. Similarly, the Kano State Ministry of Finance has noted intentions to phase out non-essential overdraft usage and prioritize capital projects financed through internally generated funds.
Financial analysts view the CBN’s directive as a natural extension of its broader prudential agenda. A senior economist at a Lagos-based consultancy remarked, “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.” The analyst further noted that improved fiscal management at the state level could free up resources for critical infrastructure and social programs 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 submit regular compliance reports, the central bank aims to create a clearer picture of Nigeria’s overall debt exposure. This data will be crucial for future policy decisions, especially as the government seeks to secure external financing and meet the conditions set by international lenders. If states heed the CBN’s advice, Nigeria could experience a modest decrease in aggregate public sector borrowing, alleviating pressure on the banking sector and contributing to a more stable inflation outlook.
However, experts caution that this transition will require strong political will and capacity building at the sub-national level. The central bank has pledged to support states with technical assistance and capacity-building programs to ensure the successful implementation of these reforms. The CBN’s call comes at a critical juncture as the country navigates a fragile economic recovery following the pandemic, heightened commodity price volatility, and a tightening global financial environment. By encouraging states to improve fiscal discipline and reduce their reliance on overdrafts, the central bank aims to strengthen Nigeria’s macroeconomic foundation and sustain momentum toward lower inflation and stronger growth.
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