COLOMBO China's Export-Import Bank will provide a loan of $278.2 million to Sri Lanka to help lay a rail track to a key port which Beijing is building that has stoked concern in neighboring India.
The port of Hambantota on the southern tip of the Indian Ocean island nation is envisioned as a refueling and service point for cargo ships, which pass a few kilometers away on one of the world's busiest East-West shipping lanes.
Sri Lanka's finance ministry said on Tuesday that the Chinese loan will be used to construct a 27 km single-line track connecting Hambantota to Matara, the biggest coastal town in the south.
"The demand for transport between the Southern Province and other provinces of the country will increase due to developments in the Southern region and operations of the Hambantota Port," the finance ministry said.
Sri Lankan President Mahinda Rajapaksa been pushing for development of infrastructure projects in the south, since the end of the civil war in May 2009.
The $59 billion economy has been increasingly relying on China, both for financing and technical expertise for reconstruction projects.
Under the new railway loan, $200 million will be provided under a preferential buyer's credit facility and the balance $78.2 million will be a Chinese government concessional loan facility, the Sri Lankan finance ministry said in a statement.
The loan will be offered at a 2 percent annual interest rate with a repayment period of 20 years, including a five year grace period.
China has loaned $1.5 billion for construction of the Hambantota port and $209 million for a nearby airport, which will be launched on March 18.
Beijing's expanding influence in Sri Lanka has caused concern in India, which feels hemmed in by a string of similar port developments stretching from Myanmar to Pakistan and that it fears give the Chinese navy a strategic boost in the region.
Rajapaksa has rejected New Delhi's concerns and said China's presence was strictly for business reasons, not political.
(Reporting by Shihar Aneez; Editing by Sanjeev Miglani)