Water scarcity is a critical issue affecting numerous regions, including Addis Ababa, Ethiopia. The city’s growing population and rising water consumption place significant pressure on its existing water infrastructure. This study evaluates the impact of water loss due to leakages in the distribution system on the demand–supply gap in Addis Ababa, utilizing the WB EasyCalc software for analysis. Data analysis from 2023 indicate that monthly water loss contributes to an additional unmet demand of 5 million cubic meters (MCM), emphasizing the urgent need for effective water loss reduction strategies to enhance supply reliability. Currently, the city achieves only 42% water supply coverage, with an average loss of 300 L per connection per day and approximately 25,000 L lost per kilometer of pipeline daily. Furthermore, non-revenue water (NRW) accounts for 41.8% of total production, with real losses constituting 64%. The Infrastructure Leakage Index (ILI) score of 27 underscores the critical need for targeted leakage management interventions. The significance of this research lies in its quantification of water loss and its direct correlation with unmet demand in Addis Ababa. The findings provide essential insights for policymakers and stakeholders, highlighting the necessity for improved infrastructure management and strategic interventions to bolster water supply reliability. Implementing effective leakage reduction measures could substantially mitigate water scarcity challenges, thereby supporting sustainable urban development and enhancing public health outcomes in a city where access to clean water is vital for economic and social stability.