In an assessment issued 15 months since the exit, the IMF board said the island's banking system was recovering while employment and economic output were growing.
It added, however, that "these achievements have not yet resulted in significant reductions in the high levels of private-sector debt, nonperforming loans."
Eurozone member Cyprus plunged into a financial crisis in 2013, leaving a number of its top banks insolvent and forcing it to negotiate painful bailout with international creditors.
It has since recovered, after the government imposed harsh austerity measures in exchange for a loan of 10-billion euro (then $13 billion) from the IMF and European Union.
In its statement on Thursday, the IMF board also urged the government to push on with its privatisation programme which has stalled in recent months.
Initial plans to sell off the state-run telecommunications company and the electricity authority have been put on the back burner.
"Directors called for further efforts to curb public debt to create fiscal headroom and insulate the downward path of public debt from potential shocks," said the IMF.
"This could be achieved by saving over performance and windfall revenues and restarting stalled privatisations," it added.
The IMF also recommended measures to reduce non-performing loans, improve credit allocation, protect the adequacy of banks' capital, and also improve the culture of payments.
The lender also called for the streamlining of court procedures for the settlement of claims and steps to ensure regulations encourage timely recognition of losses.
Cyprus Finance Minister Harris Georgiades welcomed the IMF's assessment.
"The IMF report is particularly positive and notes the remarkable progress that has been made in recent years, contributing to further strengthening investment confidence in our country and improving its creditworthiness," he said.
"The IMF's suggestions are correct and should be noted."
The Cypriot economy grew by 2.8 percent in 2016 and a similar growth rate is expected for this year, buoyed by an anticipated increase in tourism revenue.
The Mediterranean holiday island's economy has been boosted by a record tourist arrivals and income from tourism.
Eyewitness? Submit your stories now via social or:
Email: news@pulselive.co.ke
