Spain is implementing drastic spending cuts to try to slash its budget deficit to 5.3% from 8.5% in 2011.
Many economists said the target was always unrealistic.
Last weekend, Spain was given 100bn euros ($125bn; Â£80bn) in emergency loans to help its struggling banks.
The IMF said Spain needed to raise revenue from taxes, and look at further spending cuts. However, it added that Madrid should not look to cut its deficit too quickly given "an unprecedented double-dip recession with unemployment already high".
Spain has the highest unemployment rate in the eurozone, with almost one in four workers out of a job.
Earlier this year, the government announced 27bn euros of cuts from its budget as part of one of the toughest austerity drives in the country's history.
Changes included freezing unemployment benefits and public sector workers' salaries, slashing departmental budgets and increasing tax on large companies.
But the spending cuts and tax rises have undermined the economic recovery in Spain. The country is back in recession and its banks are severely under-capitalised given the collapse in the Spanish property market.
The 100bn-euro bailout has failed to restore confidence in the country's economy, with the interest rate, or yield, paid on government bonds traded in the secondary market hitting 7% on Thursday, a level widely seen as unsustainable.
Bond yields in the secondary market are seen as a good indication of investor's confidence in a government's ability to repay its debts.
Spain is likely to miss its budget targets for this year and Madrid should adopt wider reforms to reduce its debts, according to the International Monetary Fund (IMF).