China had provided assistance to Sri Lanka in both long-term project loans and day-to-day needs.

Sri Lanka, which last year handed over a strategic port to a Chinese firm for a 99-year lease as a debt swap, will soon sign a USD 1 billion concessional loan agreement with Beijing to fund a major highway project linking Colombo to the hill resort of Kandy.

The construction of the first phase of the road linking Colombo with Kandy had been delayed for more than two years due to a lack of funding.

Sri Lankan Ambassador to China Karunasena Kodituwakku, was quoted by the official media on Friday as saying that the USD one billion will be used for the first stage of the central highway.

The second stage will be financed by Sri Lankan consortiums and the third by Japanese loans.

Earlier, the chief of Sri Lanka's central bank said the country will receive a sovereign loan of USD one billion from the Bank of China in the first quarter of this year, and it will be used to meet repayments in the coming months.

Mr Kodituwakku did not confirm if it was the same loan and whether it is linked with the USD one billion loan from the Export-Import Bank of China, the state-run Global Times reported.

The envoy thanked China which he said had provided assistance to Sri Lanka in both long-term project loans and day-to-day needs. Mr Kodituwakku also revealed that the country was negotiating with the China Development Bank for short-term loans.

Playing down the allegations that China's financial assistance to Sri Lanka has led it into a debt trap, he said, "We don't agree with that. China never forced us to take a loan. If there is something wrong with the loans we have taken, it's our responsibility. It's not fair to blame China or another country, saying Sri Lanka is a victim".

According to reports, Sri Lanka owed USD eight billion debt to China.

The envoy said though Colombo has borrowed from many countries, including India and Japan, as well as multilateral organisations, it is not heavily indebted.

"This year Sri Lanka has to settle nearly USD 4 billion, and the country has more than USD 8 billion in reserves. But we cannot use all that money just to pay back. We have to keep a minimum balance," he said.

Sri Lanka is in talks with China on a free trade agreement. "They have reached consensus on many issues, but (the agreement) isn't finalised," the Ambassador said, adding "We hope this year will be the critical year to finalise it."

He said the Colombo port is a very crucial transit port serving India. India's strong economy will prop up the port as a successful entity.

Sri Lanka last year granted a 99-year lease on Hambantota port to a Chinese firm over its inability to repay loans to Beijing for the USD 1.4 billion project.

He expressed hope that Chinese firm can turn the Hambantota port into a successful facility.