Vilnius - The Lithuanian parliament voted Wednesday to increase the rate of Value Added Tax (VAT) payable on goods and services to 21 per cent from the current level of 19 per cent as the Baltic state battles to overcome one of Europe's deepest recessions.

When the measure comes into effect in September, it will represent the second time the coalition government has increased the rate of VAT in less than a year.

In January the rate rose from 18 per cent to 19 per cent but revenues are still falling significantly behind expectations.

Prime Minister Andrius Kubilius told parliament the shortfall was caused by inefficient collection methods and would improve.

Opposition leader Valentinas Mazuronas said the tax increase would only serve to depress domestic consumption.

Further evidence of Lithuania's tough economic position emerged Wednesday when official statistics showed industrial production plunged by 17.2 percent in the first six months of 2009 compared with the same period last year.

Central bank governor Reinoldijus Sarkinas said Wednesday that Lithuania's banking sector was also likely to face a tough second half of the year.

"A banking crisis tends to come a bit later than the crisis in the whole economy. Now it is coming closer," he said during a briefing with MPs.

The Lithuanian economy is expected to contract by around 18 per cent in 2009 according to Finance Ministry estimates, but the authorities are adamant that Lithuania will not need to follow neighbouring Latvia and ask for assistance from lenders such as the International Monetary Fund (IMF). (dpa)