Inappropriate use of land and poor ecosystem management have accelerated land degradation and reduced the storage capacity of reservoirs. To mitigate the effect of the increased sediment yield, it is important to identify erosion-prone areas in a 287 km2 catchment in Ethiopia. The objectives of this study were to: (1) assess the spatial variability of sediment yield; (2) quantify the amount of sediment delivered into the reservoir; and (3) prioritize sub-catchments for watershed management using the Soil and Water Assessment Tool (SWAT). The SWAT model was calibrated and validated using SUFI-2, GLUE, ParaSol, and PSO SWAT-CUP optimization algorithms. For most of the SWAT-CUP simulations, the observed and simulated river discharge were not significantly different at the 95% level of confidence (95PPU), and sources of uncertainties were captured by bracketing more than 70% of the observed data. This catchment prioritization study indicated that more than 85% of the sediment was sourced from lowland areas (slope range: 0–8%) and the variation in sediment yield was more sensitive to the land use and soil type prevailing in the area regardless of the terrain slope. Contrary to the perception of the upland as an important source of sediment, the lowland in fact was the most important source of sediment and should be the focus area for improved land management practice to reduce sediment delivery into storage reservoirs. The research also showed that lowland erosion-prone areas are typified by extensive agriculture, which causes significant modification of the landscape. Tillage practice changes the infiltration and runoff characteristics of the land surface and interaction of shallow groundwater table and saturation excess runoff, which in turn affects the delivery of water and sediment to the reservoir and catchment evapotranspiration.