This study analyzes the impact of land use/land cover (LULC) changes on the hydrology of the dry Afromontane forest landscape in northern Ethiopia. Landsat satellite images of thematic mapper (TM) (1986), TM (2001), and Operational Land Imager (OLI) (2018) were employed to assess LULC. All of the images were classified while using the maximum likelihood image classification technique, and the changes were assessed by post-classification comparison. Seven LULC classes were defined with an overall accuracy 83–90% and a Kappa coefficient of 0.82–0.92. The classification result for 1986 revealed dominance of shrublands (48.5%), followed by cultivated land (42%). Between 1986 and 2018, cultivated land became the dominant (39.6%) LULC type, accompanied by a decrease in shrubland to 32.2%, as well as increases in forestland (from 4.8% to 21.4%) and bare land (from 0% to 0.96%). The soil conservation systems curve number model (SCS-CN) was consequently employed to simulate forest hydrological response to climatic variations and land-cover changes during three selected years. The observed changes in direct surface runoff, the runoff coefficient, and storage capacity of the soil were partially linked to the changes in LULC that were associated with expanding bare land and built-up areas. This change in land use aggravates the runoff potential of the study area by 31.6 mm per year on average. Runoff coefficients ranged from 25.3% to 47.2% with varied storm rainfall intensities of 26.1–45.4 mm/ha. The temporal variability of climate change and potential evapotranspiration increased by 1% during 1981–2018. The observed rainfall and modelled runoff showed a strong positive correlation (R2 = 0.78; p < 0.001). Regression analysis between runoff and rainfall intensity indicates their high and significant correlation (R2 = 0.89; p < 0.0001). Changes were also common along the slope gradient and agro-ecological zones at varying proportions. The observed changes in land degradation and surface runoff are highly linked to the change in LULC. Further study is suggested on climate scenario-based modeling of hydrological processes that are related to land use changes to understand the hydrological variability of the dry Afromontane forest ecosystems.