BRASÍLIA—Brazil’s government needs to implement its plans to improve its financial situation and bring price increases under control to help restore confidence, competitiveness and growth to the economy, the International Monetary Fund said in a report published Tuesday.

“Fiscal consolidation should proceed without delay along the announced lines, while monetary policy should remain tight to bring inflation to target,” the report said.

Finance Minister Joaquim Levy, who took office in January, is pushing spending cuts and higher taxes to plug a budget hole caused by years of costly economic stimulus.

He has set an ambitious target of a primary budget surplus—before interest payments—equal to 1.2% of gross domestic product, reversing a primary deficit of 0.6% of GDP in 2014. At the same time, the country’s central bank is raising rates to tame inflation.

“Brazil is in a tough spot,” the IMF said. “A new economic-policy team is faced with the challenge of restoring policy credibility and bolstering confidence in economic decision-making, notably in the context of a weakening domestic and external environment.”

Slower economic growth in China, Brazil’s main trading partner, and possible monetary tightening in the U.S., which could hamper the flow of dollars to Latin America’s largest economy, are among the external problems the South American country faces, the IMF said.

“These risks could conflate if they were to combine with domestic policy shortfalls, and would threaten macro and financial stability,” the report said.

The IMF predicted in April that Brazil’s GDP would contract 1% in 2015 and grow 0.9% in 2016, in line with forecasts made by Brazilian economists. In a weekly survey by the central bank, the median forecast of 100 economists is for a 1.2% contraction this year, followed by an expansion of 1% in 2016.

The IMF forecasts were repeated in Tuesday’s report.

A big hurdle for the Brazilian economy comes from Petrobras, as the state oil company is known. Prosecutors are investigating an alleged graft scheme of huge proportions involving some of Petrobras’s largest suppliers. The case has all but paralyzed the company and the all-important oil industry.

“Risks to the outlook are significantly to the downside, and include adverse ramifications from the ongoing corruption probe concerning Petrobras,” the report said.

Write to Paulo Trevisani at paulo.trevisani@wsj.com