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I have the following issue:

enter image description here

When I try to pay, I also get the following message:

We aren't able to process your payment using your PayPal account at this time. Please go back to the merchant and try using a different payment method.

Does this mean that I can't pay for services? Is this message linked with the image that I have shown? How to resolve this error?

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Yes, they've essentially locked down your PayPal account due to suspicious activity and now want proof that you are the owner of the account. You need to provide the information they're asking for in the message in the image you linked, or else contact their customer support.

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