Credit ratings influence investment decisions, borrowing costs, capital market development, and economic confidence. In a country recovering from its most severe economic crisis in modern history, the importance of a credible and independent rating agency cannot be overstated.
Sri Lanka today finds itself in a unique position. The country’s economic future continues to be shaped not only by domestic policy decisions but also by assessments issued by international rating agencies such as Fitch, Moody’s, and S&P. These agencies have enormous influence over investor perceptions, sovereign borrowing costs, and access to international capital markets. Yet the events leading up to Sri Lanka’s 2022 debt crisis raise an important question: should Sri Lanka rely exclusively on foreign rating agencies to define its economic reality?
The answer is no.
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The Limits of Foreign Rating Agencies
Global rating agencies play an important role in international finance, but they are not infallible. Their assessments are often based on global methodologies that may not fully capture local economic conditions, political realities, social dynamics, or reform trajectories.
Sri Lanka’s experience illustrates this challenge. During periods of economic stress, rating downgrades by foreign agencies accelerated negative investor sentiment and increased borrowing costs. While some downgrades reflected genuine risks, critics argue that international agencies can become excessively reactive, amplifying crises rather than merely measuring them. Sri Lanka’s sovereign rating was downgraded multiple times before the 2022 default and later upgraded following debt restructuring progress.
A strong domestic rating agency can provide an alternative analytical perspective rooted in local expertise, local data, and a deeper understanding of Sri Lanka’s economic environment.
Why Sri Lanka Needs a Strong National Rating Agency
Many successful economies maintain respected domestic rating agencies alongside international firms. Japan, India, China, Malaysia, and South Korea have all developed strong local institutions capable of evaluating domestic companies and financial instruments.
A domestic agency can:
- Better understand local business conditions.
- Maintain continuous engagement with issuers.
- Develop sector-specific expertise.
- Provide more granular analysis of local risks.
- Contribute to capital market development.
Lanka Rating Agency itself states that it was established as a domestic credit rating agency licensed by the Securities and Exchange Commission and supported by local financial institutions while receiving technical expertise from Pakistan’s PACRA.
The challenge is not whether Sri Lanka should have a national rating agency. The challenge is ensuring that such an agency is genuinely independent.
Independence Is More Important Than Ownership
The value of a rating agency depends entirely on market confidence.
Investors do not trust ratings because they are local or foreign. They trust ratings because they believe the rating process is independent from political influence, shareholder pressure, institutional affiliations, and commercial interests.
If a rating agency becomes associated with any particular institution, shareholder group, professional body, or business network, questions inevitably arise regarding its objectivity.
This is why governance matters.
LRA’s disclosed shareholder base includes major financial institutions and corporate investors, while its board consists of experienced business and finance professionals. The agency also states that it has independent directors, independent appeal committees, compliance oversight, and governance safeguards designed to prevent conflicts of interest.
However, governance best practices require more than compliance with minimum standards. They require a structure that visibly demonstrates independence.
Why Institutional Dominance Can Create Perception Problems
A rating agency should never be perceived as representing the interests of any particular institution, professional body, shareholder bloc, or financial group.
Whether influence comes from banks, investors, professional associations, or political interests is ultimately irrelevant. The market’s concern is perception.
Even when no improper influence exists, excessive concentration of influence can weaken confidence.
This is particularly important in smaller economies such as Sri Lanka, where business, regulatory, and professional networks are often closely interconnected.
The goal should be a governance structure where:
- No single stakeholder group exercises disproportionate influence.
- Independent directors constitute a meaningful portion of the board.
- Leadership rotation occurs periodically.
- Rating committees operate independently from ownership interests.
- Governance policies are publicly disclosed and regularly reviewed.
A National Institution Must Belong to the Market
Sri Lanka needs a national rating agency that commands confidence both locally and internationally.
Such an institution should not be viewed as an extension of foreign rating agencies. Nor should it be viewed as representing any single shareholder group, professional institution, or corporate network.
Its primary allegiance must be to analytical integrity.
The future success of Lanka Rating Agency will not depend on who owns shares, who sits on the board, or which foreign partner provides technical expertise. It will depend on whether investors believe its ratings are independent, objective, transparent, and free from undue influence.
That is the standard expected of every credible rating agency in the world. It should also be the standard expected in Sri Lanka.
