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ndonesia has yet to fully benefit from the ample fiscal space provided by the reallocation of fuel subsidies, with reform initiatives yielding slower-than-expected economic gains as state budget execution still faces implementation challenges, the World Bank says.

The country'€™s output and employment growth are weakening, while major policy initiatives are facing implementation challenges from fuel pricing to infrastructure, the World Bank noted in its quarterly report entitled '€œSlower Gains'€, which was released on Wednesday.

It argued that the slower gains are '€œa sign of serious constraints and a shifting economy'€, suggesting policy makers implement policies and reforms that support the rebalancing process.

President Joko '€œJokowi'€ Widodo has aimed for economic growth to hit 5.7 percent this year in the revised 2015 State Budget, the first phase of an ambitious economic expansion in which he planned to push up growth to 7 percent within five years.

To achieve the objective, Jokowi has reallocated funds from fuel subsidies to growth-generating infrastructure projects, doubling the nation'€™s capital expenditure (capex) spending from Rp 135 trillion to Rp 276 trillion (US$20.6 billion) this year in the revised 2015 State Budget.

But the World Bank noted that the budget execution was proving difficult: Capital spending is down by 18 percent relative to 2014, undermining the government'€™s intention of a big push in infrastructure investment.

The agency also revised downward its growth forecast for Indonesia this year from 5.2 percent to 4.7 percent, on the back of sluggish government spending, slowing consumption and weak exports caused by a downturn in commodity prices. The economy has slowed to a six-year low level of 4.7 percent in the first quarter this year.

Such a structural slowdown would affect overall labor absorption in the economy, as declining employment growth was observed across Indonesia, except in Nusa Tenggara, the report noted.

'€œIn many countries 4.7 percent growth would have a positive impact on the labor market, but not so much in Indonesia, because you have 2.5 million people entering the workforce every year and you'€™ll need growth above 5 percent to absorb them all,'€ noted Ndiamé Diop, World Bank lead economist for Indonesia.

With various economists already revising down their growth forecasts for Indonesia, government officials have claimed that things might not be as bad as they seem, predicting that growth will pick up in the second half of this year because of the acceleration of ministries'€™ spending.

'€œIt'€™s not fair to say that the gains [from Indonesia'€™s economic reforms] are slowing because the growth slowdown has recently become a common phenomenon,'€ said Suahasil Nazara, the head of the Finance Ministry'€™s fiscal policy agency.

Investors'€™ confidence toward Indonesia was still strong, Suahasil claimed, citing the recent decision taken by the Standard & Poor'€™s rating agency to upgrade the country'€™s credit rating outlook to '€œpositive'€ from '€œstable'€ in May.

'€œIt'€™s not slower gains, it'€™s just the gains are not yet there,'€ he said. '€œWe will have gains later if [our budget] is spent properly.'€

Amid the challenges, the World Bank said that some of the economic policies were moving the country in the right direction, notably with its tax collection efforts, such as the adoption of electronic tax return submissions, or the improvements in income tax audit strategies.

Amid heightening external risks, Indonesia is still in a good position to respond by expanding infrastructure spending to the extent possible given the deficit limit, or closely following through on revenue collection measures, said Diop.

He also suggested the government communicate its new policies and decisions to investors in a consistent way. '€œConsistent communications reduces uncertainty,'€ said Diop.