TUNIS - Tunisia on Friday paid a $506 million instalment on its foreign debt, its biggest payment this year, the North African nation's finance ministry said, dispelling doubts about the possibility of a default.

Tunisia, which has seen its debt burden rise and economy shrink by 8.8% in 2020, with its fiscal deficit at 11.4% last year, has started talks with the International Monetary Fund on a financial aid package.

Tunisia estimates its debt repayments due this year at $5.8 billion, including $500 million payments in both July and August.

Officials told Reuters that Tunisia will continue to pay its foreign debt. But economists warn that Tunisia's foreign currency reserves will decline significantly with the debt repayments, hurting the value of the local dinar currency.

Tunisia is facing an economic and social crisis that has worsened due to the effects of the COVID-19 crisis, with the virus spreading rapidly in the country.

A sovereign default in Tunisia - though highly unlikely in the next 12 months - could cost the country’s banks up to $7.9 billion, S&P Global Ratings said in May.

(Reporting by Tarek Amara Editing by Paul Simao) ((tarek.amara@thomsonreuters.com;))