"The Spanish economy has continued its impressive recovery and strong job creation," the IMF wrote in a report unveiled in Madrid.
But "unemployment, especially long-term and youth joblessness, is still very high, while the use of temporary contracts for new jobs remains widespread."
In its report, the IMF estimates that Spain's economy will grow 3.2 percent this year and will continue to expand in 2017, albeit at the more moderate rate of 2.3 percent -- still better than its initial prediction of 2.2 percent.
Spain's economic growth is one of the most dynamic in the eurozone after the country emerged from five years of on-and-off recession at the end of 2013 caused by the burst of a property bubble in 2008.
During those years, millions of Spaniards lost their jobs and unemployment reached close to 27 percent in 2013.
The conservative government launched a series of spending cuts and a labour law reform that reduced severance pay and introduced a new permanent contract with a one-year trial period.
This shortened Spain's jobless queue, and unemployment stood at 18.9 percent in this year's third quarter, a marked decrease but still the second-worst rate in the European Union after Greece.
The reforms "continue to pay off," the IMF said, adding they must nevertheless "be expanded to sustain strong growth and employment prospects over the medium term."
"There is still too much incentive for employers to hire on a temporary basis," said Andrea Schaechter, mission chief for Spain at the IMF.
The organisation called on Spain to continue to make efforts to reduce its public deficit, which is expected to come in at 4.6 percent of GDP this year and at 3.1 percent in 2017 -- just short of the three-percent limit set by the European Union.
But in order to be "growth- and job-friendly," it suggested raising revenues - by for instance reducing value-added tax exemptions or increasing excise duties and environmental levies - rather than cutting more spending.