Youth entrepreneurship is an emerging enquiry, which is critical in addressing unemployment crisis among young people. This paper explored prospects and challenges of youth entrepreneurship in developing economy, Zanzibar in Tanzania. The paper adopted qualitative methods using thematic analysis techniques to derive prospects and challenges from recorded transcripts according to administrator’s perspective from public and private institutions responsible for entrepreneurship in the country. The study found that youth entrepreneurship is strategic initiative of transforming necessity entrepreneurship into opportunity entrepreneurship, stimulating innovation initiatives for solving challenges facing society, promoting sectoral linkage, job creation and building entrepreneurial culture. However, youth entrepreneurship is constrained internally by lack of funds, poor growth and sustainability of youth enterprises, lack of entrepreneurial mindset and alertness to opportunities, while externally by poor coordination of public institution responsible for entrepreneurship development, bureaucracy, and lack of family support. The study becomes empirical evidence on the importance of youth entrepreneurship and thereby recommended for policy intervention would ameliorate the challenges and helps build entrepreneurial culture for the development of entrepreneurship in the country.