The Export-Import Bank of India has approved a $300 million worth of line of credit to Ethiopia, paving the way for construction of a railway line linking this landlocked country in the Horn of Africa to a port city in neighbouring Djibouti.

An agreement in this regard was signed between T.C.A. Ranganathan, chairman and managing director of Exim Bank, and Ahmed Shide Mehamed, Ethiopian State Minister of Finance and Economic Development (MoFED), in New Delhi Thursday.

"Ethiopia being a landlocked nation, the railway link to a port city will provide impetus to its growth, particularly in the northern region of the country," the minister said.

The railway line is the first part of a larger regional project to improve railway connectivity in Ethiopia and other east African countries, he added.

The loan approval had been under discussion since the visit of Prime Minister Manmohan Singh to Ethiopia in 2010 under the African Union Region Development Scheme, which was initiated by India.

The proposed railway link will connect the city of Asaita, some 670 km of the Ethiopian capital Addis Ababa, to the port city of Tajourah in neighbouring Djibouti.

The link is expected to improve regional connectivity and boost growth in the east African country, according to Debo Tunka, deputy chief executive officer and head of infrastructure development at the Ethiopian Railway Corporation (ERC).

"India as always is playing a great role in the development of Ethiopian infrastructure by keeping its promises," Tunka told IANS.

The railway link will initially be utilised for transporting goods but later it will be opened for passenger traffic. About 50 km of the 210 km line will be in Djibouti, while the rest will be in northern Ethiopia.

"The new line will be very important for Ethiopia because it will give us an access to a second port and boost economic activities in the country," Tunka said.

Founded in 1982 under the Export-Import Bank of India Act 1981, Exim Bank is the first export finance institution of the country. The bank provides other credit lines to the Ethiopian government in the sugar and rural development sectors.

The detailed project report, being prepared by the Rail India Technical and Economic Service (RITES), is expected to be finalised within two months.

Established in 1974 by the Indian government, RITES provides services in rail transport management to operators in India and abroad.

After financial closure, the Ethiopian government is expected to invite bids from Indian companies. Both public and private sector companies can participate in the bidding process.

The credit line would entail concessional funds at an interest rate of 1.75 percent.