Hit by delays in payments from donor countries and by Israeli restrictions, the Palestinian Authority is suffering a financial crisis, even as it aspires to become a state.
On Tuesday it paid its approximately 170,000 employees in full only after they threatened to go on strike after receiving half-pay the month before.
But it warned that doing so would seriously hamper the government's ability to function as it struggles with the funding shortfall.
"In light of the continued financial difficulties, the payment in full of salaries will significantly reduce the capacity of the government to meet other needs over the next month, and everyone understands that," prime minister Salam Fayyad said on Sunday.
For months, Fayyad has warned of financial woes due to a chronic shortfall in financial support pledged by donors, especially Arab countries.
On July 26, he even attended a special session of the Arab League, requested by Palestinian president Mahmud Abbas, in a bid to push member states to honour their aid commitments.
He said the Palestinian Authority had received only $79 million (55.6 million euros) so far in 2011 out of $330 million pledged by Arab nations for a six-month period.
Saudi Arabia subsequently transferred a supplementary donation of $30 million, but the hole in the Palestinian budget remains large.
The European Union said Tuesday it had paid 22.5 million euros to enable the Authority to "pay July salaries and pensions of nearly 83,000 employees and retirees."
To cushion the impact of the crisis, the economy ministry this month capped prices for basic food items in the run-up to the Muslim holy month of Ramadan, which began Monday.
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The maximum price of a kilo of bread is now set at 3.50 shekels ($0.70, 0.49 euros), that of a 10 kilo bag of rice is 57 shekels and that of 10 kilos of sugar is 44 shekels.
Beyond the current crisis, national economy minister Hassan Abu Libdeh says the Palestinian economy faces structural impediments that are the result of Israel's occupation.
"There are many United Nations member states, unable to pay their employees, who borrow," he said. "The financial crisis facing the Palestinian Authority is now mainly due to the fact that it cannot take full advantage of its economy."
"If Israel were to lift only 10 percent of its restrictions on the Palestinian economy, it would represent an income higher than our monthly needs," he said.
"If Israel lifted its restrictions on agriculture, the contribution of agriculture to national income would be multiplied by eight."
The current financial crisis comes as the Palestinians prepare to head to the United Nations to seek membership for a state on the lines that existed before the 1967 Six Day War.
But Libdeh said he was convinced that a state unencumbered by Israeli occupation would be economically viable and stable.
"We're not worried about the ability of the Palestinian state to attain a minimum level of economic prosperity," he said, noting that international institutions have given Fayyad's management high marks.
Robert Serry, the UN's special coordinator for the Middle East peace process told the world body last week that the Palestinians are "ready to assume the responsibility of a state in the near future."
His conclusions echo those issued in recent months by both the World Bank and the International Monetary Fund, with both institutions lauding the nascent state's progress towards a viable economy.
But the World Bank warned that the Palestinian economy was still lacking a "vibrant private sector," something it said could not be altered "while Israeli restrictions on access to natural resources and markets remain in place."