The management of water in river basins depends on accurate assessment and efficient distribution of limited water resources. This study investigates the water resource potential, demand, and allocation in the upper Genale River basin under various future scenarios. The Soil and Water Assessment Tool was used to generate streamflow data, and the Water Evaluation And Planning model was used to allocate water demands optimally for the period 2020–2050. Scenarios considered population growth, increased water consumption, irrigation expansion, and climate change (RCP4.5 and RCP8.5). Results indicate the livestock sector as the current primary water user, followed by domestic and commercial sectors, with irrigation having the lowest consumption. The reference scenario projects a significant increase in total water demand (79.99 MCM in 2020 to 330.91 MCM in 2050) due to population and livestock growth. Scenarios with high population growth and increased consumption or irrigation development showed substantial demand increases, highlighting the pressure these factors exert. Additionally, the study highlights a significant risk of water scarcity, especially in scenarios with a combination of high population growth, increased irrigation development, and climate change. Furthermore, the study highlights the need for diversifying energy sources beyond hydropower due to potential water limitations. The need for proactive water management policies to tackle these challenges is emphasized and such policies should be based on improved local-scale monitoring and accurate projection of freshwater to promote sustainable water allocation for future generations. For the upper Genale River basin where we have significantly improve understanding of water availability, demand, and allocation, a robust regulatory framework on water supply is crucial for water resources management under rising human population.