On your paint problem I can't be much help. This usually happens because of damp -- please get a damp expert to make sure that there isn't any damp lurking in your walls. I had this once when I had pipes leaking inside the walls. I didn't know that. The other alternative is something like painting before the plaster is dry or some kind of chemical mismatch. I do know you will have to scrape all the mucky powdery stuff away and start again, at least on those areas. Don't try to seal and prime and repaint until you know exactly what the problem is and how to fix it.

Hi Ni, I just thought of something....did you say you planned to do the stencil motifs on the window wall? If so, I am thinking they will be mostly hidden by the curtains. I wonder if it might be better to stencil the long wall that is on the right side of the room when looking toward the window. I could see this being a pretty backdrop to the prayer box (I think that’s what you called it?) and your wood cuttings. Then maybe the opposite wall (the one with the kitchen doorway) could hold a large piece of art?

depends. both have their own charm :)

I feel partitions are not needed. You already have too much for the space. Adding a partition will shrink the space further. The simplistic solution, you do not wish to discard any furniture would be to paint all the walls in lighter pastles. And use some wall painting frames to highlight certain walls.