Author(s): Jakob Wegener Friis (Directorate-General for Economic and Financial Affairs)
Payment arrears have been an endemic phenomenon throughout Romania's economic transition and have been widely used as financing for both state-owned and private companies. Political economy considerations and a vertically-integrated industrial structure lay behind the persistence of arrears.
Only in recent years the accumulation of new arrears to general government has been significantly reduced, thereby improving fiscal transparency and reducing the hidden subsidies provided to households and companies via the tolerance of unpaid tax and social security obligations. Efforts to step up the restructuring of state-owned enterprises and stricter enforcement of overdue claims lay behind these results.
The repeated use of debt cancellation has given rise to adverse incentives and seems to have failed in improving financial discipline. Weak creditor protection and protracted bankruptcy proceedings remain main obstacles to effectively hardening the budget constraint.
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