Washington – Events in East Timor and the Bank Bali scandal threaten to derail Indonesia's fragile economic recovery but it has not yet been knocked completely off track, the World Bank said Thursday.

"The sudden upsurge in violence in East Timor and the disturbing implications of the Bank Bali affair have shaken market confidence," the Bank said in a quarterly review of East Asia.

"These developments have interrupted, and may even derail, an otherwise steady march toward economic stabilisation," the report said.

But Jean-Michel Severino, the World Bank's vice-president for East Asia and the Pacific, said the gains had not yet been reversed, noting that the Indonesian economy had attained two quarters of positive economic growth this year "despite the political events."

The growth this year could partly be ascribed to the fact that the economy had fallen so far it had to bottom out at some time, but "what impresses us quite a lot is that this [growth] has taken place despite the political events," Severino said.

The economy had shown great resilience and capacity to rebound and "a lot of investors, both domestic and international, are waiting to jump and come back as soon as the political situation stabilises," Severino said. Investors remember the "tremendous" growth record of previous years and "are ready to try again."

In its World Economic Outlook report released on Wednesday the IMF forecast the Indonesian economy would shrink 0.8 percent this year and return to positive growth of 2.6 percent next year, after shrinking 13.7 percent in 1998.

But Severino said that "what is absolutely key right now" for the economic turnaround to continue "is a good clean electoral process" in presidential elections in November.

International Monetary Fund managing director Michel Camdessus said earlier Thursday that a resumption of IMF aid to Indonesia depended on developments in East Timor and resolution of the Bank Bali scandal.

Camdessus said he hoped that with the arrival of a multinational peacekeeping force in East Timor that a "more acceptable situation will progressively be established."

But he said it would not make sense for the IMF to resume aid until bilateral donors did so, as IMF aid only worked as part of a concerted effort.

Camdessus also said there would be no resumption of IMF funds until the scandal surrounding Bank Bali is resolved. "We have asked for the investigations to be speeded up and the results of the investigation to be published" before funds can resume, Camdessus said.

The scandal centers on the payment of an 80-million-dollar commission by the bank to a company owned by a ruling Golkar party executive. The bank paid the commission to recover money owed by three banks which had been closed down.