Prime Minister Abiy Ahmed's government said on Tuesday it would fully accept and put into operation the Algiers accord, signed in 2000, that ended its war with Eritrea. A state of emergency has also been lifted two months early.
The decision on the peace deal means Ethiopia will have to cede disputed land it has occupied for nearly 20 years.
"The suffering on both sides is unspeakable because the peace process is deadlocked," the chief of staff for the prime minister's office, Fitsum Arega, said on Twitter. "This must change for the sake of our common good."
Eritrea's government is yet to make a public statement.
New premier with reform program
A 41-year-old former army officer, Abiy Ahmed was appointed prime minister by the ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) in April. His predecessor resigned in the face of popular protest over unemployment and lack of political freedom.
Abiy has announced a radical reform agenda for the East African nation of 100 million people following 26 years of authoritarian rule by the EPRDF elite. Abiy also promised greater democracy and economic reform.
Ethiopia is facing a difficult foreign exchange situation, with reserves believed to cover only a month's imports. The Financial Times reported that China, a major investor, has reduced its financial ties to Ethiopia because of concerns over foreign exchange shortages and the national debt.
The EPRDF has been in power since 1991 and controls every seat in Parliament. It said on Tuesday that the government would sell off minority stakes in state-owned enterprises and foreigners would be allowed to invest in some businesses.
Ethio Telecom, Ethiopian Airlines, Ethiopian Power, and the Maritime Transport and Logistics Corporation are to be partially privatized to "improve on the achievement of fast economic growth and boost exports," according to the EPRDF.
Eritrea and Ethiopia - key dates
1993 - A referendum in Eritrea secured independence from Ethiopia
1998 - Conflict over the border demarcation begins, leading to thousands of deaths
2000 - Eritrea and Ethiopia sign an agreement to cease hostilities
2002 - The joint boundary commission presented its final ruling, but Ethiopia refused to accept the handing over of key locations, including the town of Badme, to Eritrea.
Ethiopia has been landlocked since 1993 when Eritrea, which makes up the country's entire Red Sea coast, became an independent region.
Eritrea had become part of Ethiopia after World War II, when both territories were liberated from Italian occupation. A coup in 1974 led to a Soviet-backed government in Addis Ababa and ongoing conflicts with separatist groups in Eritrea until the end of the 1980s with the end of the Soviet Union.
Now one of the world's most closed-off countries, Eritrea has been ruled since 1993 by President Isaias Afwerki, who has justified restrictions inside the country on the grounds that Ethiopia posed a national security threat. There is compulsory lifetime national service, and few human or civil rights. Many Eritreans have fled the country to seek refuge in other African nations, as well as Israel and Europe.
jm/se (Reuters, AP, AFP)