JAKARTA July 8 (Reuters) - A review of Indonesia's strict labour laws could be completed in one or two years, an official from the manpower ministry said on Thursday, longer than hoped for by investors looking for flexibility in hiring.
Indonesia is attracting strong interest from market investors but analysts say laws that enforce high severance pay and make it hard to fire staff are obstacles for manufacturers and other foreign direct investors.
Abdul Wahid Maktub, special adviser to the minister of manpower and transmigration, told foreign reporters the labour law would be rewritten as part of a review of a range of laws.
"In the labour law reform, there are a lot of contradictions," he said. "The president has set up a special team to harmonise all regulations and what should be prioritised. I estimate maybe after one or two years, it will finish."
Maktub said the aim of the review was to "make a more conducive environment and atmosphere for investors to come here".
"Most of us would have hoped this would have happened five years ago," said Malcolm Llewellyn, the chairman of the British Chamber of Commerce in Indonesia.
President Susilo Bambang Yudhoyono has vowed to push economic growth above 7 percent by 2014, up from 4.5 percent in 2009, but needs a huge influx in foreign investment to achieve that.
A suite of reforms -- in areas such as tax, customs and corruption -- undertaken during Yudhoyono's first term have helped boost Indonesia's standing with investors. Yudhoyono was re-elected for a second five-year term last year.
But analysts say more needs to be done in areas such as labour reform, judicial reform and infrastructure development before Indonesia can reach an investment grade sovereign rating, a prospect drawing capital flows to its bond market.
"Labour law is one key area which is hurting the investment climate for Indonesia," said Anton Gunawan, chief economist for Bank Danamon. "It is too costly for companies to fire people. They cannot restructure."
Dita Indah Sari, a labour activist jailed by ex-President Suharto, said trade unions had offered to compromise on issues such as severance pay.
"But the government doesn't know what their position is. Is it because they don't have the courage to face the reaction from the workers or from employers?"
Danamon's Gunawan said he was sceptical a new draft labour law would be ready within two years as the issue is politically sensitive and an election is scheduled for 2014.
"Two years means 2013. That close to the election? I doubt it," he said.