Kester Eddy in Pristina -

There are perhaps two-dozen unlicensed hawkers in daytime on Mother Theresa Boulevard, Pristina's main pedestrian drag; the number doubles for the evening trade when residents take to promenading along the street. Selling anything from imported mobile phones to locally-sourced natural crystals, the hawkers provide living proof of the grey economy in Kosovo.

Ahmed Shala, Kosovo's finance minister, sits in his office not 100 metres from this illicit-trading. He admits that the informal economy probably accounts for 25-30% of registered GDP, but with unemployment estimated at anything between 35% and 45%, a few score eking out a living nearby are not his first priority.

Not that he is over-awed by the challenges facing this country of some 2m souls just 27 months into an independent existence. On the contrary, Shala, in fluent English, is eager to stress that Kosovo bucked the dismal global trend in 2009, its economy expanding by 4.4% - although he admits this was boosted by state spending. "We have the highest GDP growth in the region - Kosovo has withstood the biggest test of economic and political stability," he says.

Moreover, he outlines a string of planned developments: a new 600-megawatt lignite-fired power station, a score of mini-hydro plants, Pristina airport's expansion, telecommunications privatisation and last, but not least, a new €800m motorway linking Serbia to the Albanian border. These projects, he says, are drawing in scores of potential investors to Pristina.

Even the informal economy is coming clean. "We've issued about 48,000 new tax numbers in the past eight months. We cut tax rates by 50% and still collected more tax income - there is no longer any incentive to hide employment," he says.

All this and an agreement with the International Monetary Fund in May on a €110m standby loan that paves the way for additional finance from the World Bank and EU to help fund developments arguably give good cause for Shala's optimism.

Lack of deeds

Nevertheless, the challenges remain formidable. Kosovo is not yet fully independent, with a variety of international bodies, including Eumix, the EU's "rule of law" mission, having the final say on judicial and policing matters.

Serbia, from which Kosovo seceded in 2008, refuses to recognise either the breakaway state or its customs stamps, severely hampering export opportunities. Meanwhile areas in northern Kosovo, populated largely by ethnic Serbs, are effectively outside Pristina's jurisdiction.

Adding to these uncertainties, allegations of high-level corruption frequently surface; in May, Eumix investigators raided the homes of senior officials, including that of the minister for transport and telecommunications.

Robert Wright, chief executive of Raiffeisen Bank Kosovo - the country's second largest bank in terms of assets - prefers to emphasise Kosovo's recent progress and future potential. He notes that Kosovo's banking sector remains buoyant - industry profits hit €25m last year - although the global crisis meant remittances from workers abroad slipped by 6% to just over €500m. But neither does he play down difficulties. "We are keen to develop the mortgage market. The population is very young and bright, and home ownership is great for the economy. But all the banks, are a little nervous," he says.

Legal problems regarding title, along with the ability to win and enforce repossession orders, plus slow-working courts, impede progress. "This is a real opportunity, but no one party can fix it, and the government and legal professionals all have to [consult]. But when we get around a table, there always seems to be nodding heads - then nothing actually happens," Wright says.

Others are more scathing in their criticism. "This government, by changing its mind so many times, has chased away all the serious investors for the power station projects. RWE [the German utility], CEZ [the Czech state utility] and AES [the US utility] have all scaled down or left. We have dealt with them in a humiliating way," says Mimoza Kusari-Lila, former head of the American Chamber of Commerce in Kosovo and now vice-president of an opposition party.

And even though she accepts the need to upgrade infrastructure, Kusari-Lila says the proposals and contracts remain opaque. "The highway itself makes sense, but we've not seen details, no real economic evaluation. It should be part of an overall Kosovo development plan, but we don't have one, and we don't even have the money for this road; we are having to sell PTK [the fixed-line telecom firm] to finance it," she says.

Shala insists the government has the money for the road, that it will create up to 4,500 jobs, and that by giving exporters easy access to the Albanian port of Durres, it will add 2 percentage points to GDP. He also predicts economic growth of "more than 5%" this year.

Kosovo's reputation as a place to do clean business, however, remains in dispute. As a recent report by the Youth Initiative for Human Rights, an NGO, put it: "Organised crime is re-shaping; today you have to be connected with someone in government, or you will not survive."