It is evident that the means of subsistence of the community have a significant impact on the management of natural resources. This study examined the socio-economic drivers of LULCC and assessed the impacts of such changes on rural livelihoods in Shato forest, southwest Ethiopia. To map the land use and land cover, supervised classifications were used. The data were collected from 358 household heads through semi-structured questionnaires. A logistic regression model was employed to investigate the dependence of rural households on forest resources. LULC analysis results showed that about 308.29 ha of wetland and 3215.6 ha of natural forest were converted to other land use types during the last 30 years. The findings reveal that a household’s education level, household size, distance from the market, total land owned, skills and social network significantly affect their dependency on forest resources. Respondents gave high rankings to covariates such as erratic rainfall (1.70), market price (1.53), low crop output (1.28), and inadequate infrastructure (1.24). These covariates force rural communities of the study area into two major livelihood diversification strategies. These were crop and income diversification. The study comes to conclude that, the extensive and imprudent use of natural resources is a result of changes in livelihood strategies to cope up with the aforementioned shocks. Thus, the decreasing nature of forest resources results in covariate shocks in the study area and needs serious intervention mechanisms to tackle this trajectory of catastrophe.