Daniel Adaji
The Central Bank of Nigeria (CBN) has intensified calls for closer cooperation with state governments as it moves to strengthen the country’s transition toward an Inflation Targeting (IT) monetary policy framework, warning that price stability cannot be sustained without coordinated fiscal discipline across all tiers of government.
The apex bank said sub-national fiscal behaviour plays a decisive role in shaping inflation outcomes in Nigeria’s federal structure, stressing that expectations management—a core pillar of inflation targeting—could be undermined by uncoordinated spending, borrowing and debt practices at the state level.
Speaking during an engagement with sub-national stakeholders facilitated through the Nigeria Governors’ Forum Secretariat in Abuja recently, the Deputy Governor, Economic Policy Directorate, Dr. Muhammad Sani Abdullahi, said the success of the framework depends on strong alignment between monetary and fiscal authorities.
In a statement on Sunday, he described inflation targeting as a shift to a “more rule-based, transparent and forward-looking monetary framework” that requires deliberate coordination with state governments.
“While the Central Bank retains responsibility for deploying monetary policy tools to control inflation, fiscal actions, particularly at the sub-national level, play a significant role in shaping inflation outcomes within a federal system such as Nigeria’s,” he said.
Abdullahi explained that inflation targeting is fundamentally about managing expectations—anchoring how households, businesses and investors anticipate future price movements. When expectations are stable, inflation tends to be more predictable and easier to control.
He, however, warned that “uncoordinated or expansionary fiscal actions by State Governments could either reinforce or undermine monetary policy signals.”
According to him, states influence inflation through borrowing decisions, wage bills, domestic debt accumulation, expenditure patterns, capital project execution, salary arrears and reliance on overdrafts, among others.
“In an inflation-targeting regime, persistent, unpredictable or expansionary fiscal behaviour at the sub-national level can significantly undermine price stability,” he said.
He further noted that avoiding “fiscal dominance”—a situation where government borrowing pressures force the central bank into financing deficits—is essential for the credibility of inflation targeting. He stressed that this discipline must also apply at the state level.
He urged state governments to reduce reliance on overdrafts, strengthen debt sustainability frameworks, improve budget realism, enhance revenue forecasting and better coordinate fiscal operations with macroeconomic conditions.
Under the framework, he outlined four key responsibilities for states: maintaining fiscal discipline and predictability, pursuing responsible borrowing, strengthening cash and debt management coordination, and improving internally generated revenue mobilisation.
He cautioned that “unplanned expenditures, excessive supplementary budgets and unsustainable debt accumulation could trigger liquidity shocks and elevate inflationary risks.”
The Deputy Governor reiterated that inflation targeting is a collective commitment to stability and long-term economic growth, adding that while the CBN remains accountable for price stability, success depends on disciplined fiscal behaviour nationwide.
The Director of Monetary Policy Department, Dr. Victor Oboh, described inflation targeting as a “win-win framework” that benefits households, businesses and government by anchoring expectations, improving policy credibility and reducing macroeconomic uncertainty.
He said price stability cannot be achieved through monetary policy alone, especially in a federal system where sub-national spending and borrowing decisions significantly influence liquidity conditions.
The engagement, he added, was designed to strengthen mutual understanding and deepen coordination between the CBN and state governments as Nigeria transitions to the new policy framework.
“Sub-national governments play a pivotal role in Nigeria’s macroeconomic landscape, as decisions on wage policies, capital spending, debt accumulation and revenue mobilisation directly shape aggregate demand and inflation dynamics,” he said.
On his part, the Executive Director, Policy, Strategy and Research at the Nigeria Governors’ Forum (NGF), Prof. Olalekan Yunusa, commended the CBN for what he described as a strategic and inclusive reform process.
He said involving states early in the transition reflects a recognition that sustainable macroeconomic stability requires coordinated action across all levels of government.
The engagement brought together representatives from over 20 states, including Commissioners of Finance and Economic Planning, Accountant-Generals, State Statistician-Generals and other senior officials, who expressed support for the CBN’s reform agenda and pledged cooperation in strengthening the inflation targeting framework.
Inflation targeting, as explained by the CBN, is a monetary policy framework in which the central bank publicly announces a specific inflation rate or range as its primary objective and uses policy tools—such as interest rates—to steer inflation toward that target. It relies heavily on transparency, credibility, and the anchoring of public expectations to achieve price stability over time.
