About half of Safad's revenue depends on purchases by the Palestinian Authority, so the government's financial woes are a major blow to its operations. In 2011, client orders have dropped as much as 10 per cent. Revenue is expected to stagnate in 2012 for the second straight year. Furthermore, Safad is freezing recruitment and new investments and halving its marketing costs.

Our clients are hesitant to participate in government tenders for fear of a long delay in payments, and this is badly affecting our business, said [Ibrahim] Barham, the 46-year-old founder and chief executive of his Ramallah-based company.

Safad, one of the biggest information technology companies in the West Bank, is hardly alone.

Dozens of Palestinian companies from sectors including technology, construction and pharmaceuticals that do business with the Palestinian Authority are scaling back expansion plans and reducing their budgets because their biggest client can't pay them.

The Palestinian Authority, which is dependent on foreign aid to fill a deficit projected at US$1.1 billion (Dh4bn) in 2011, has blamed its crisis on donors - especially Arab states - failing to provide promised funds. The biggest Arab donors to the Palestinian Authority in recent years have been the UAE, Saudi Arabia and Kuwait.

Israel has also worsened the Palestinian government's financial condition by several times suspending monthly transfers of some US$100 million (Dh368m) in tax revenues that it collects on behalf of the Palestinians and that are mainly used to pay for salaries. The transfers were stopped as punishment for the Palestinian's successful bid for admission to the United Nations' cultural agency Unesco, which was part of a larger effort to gain admission as a state in the world body.

As a result, the Palestinian Authority now owes its suppliers from the private sector more than US$400 million and companies have said the government had more than halved its spending on some private sector goods and services. Additionally, the 150,000-strong staff of the Palestinian Authority - the West Bank's biggest single employer - were also spending less because they have not been paid on time or in full three times in the past year.