Watershed hydrology comprehension is fundamental to the efficacious management of water resources and the formulation of sustainable solutions. This research used the soil and water assessment tool (SWAT) to analyze the hydrological dynamics of the Genale Dawa‐3 dam watershed, to advance sustainable water management strategies. Model calibration and validation were performed using sequential uncertainty fitting (SUFI‐2) within SWAT‐CUP, and performance was assessed through various statistical measures including R2, NSE, PBIAS, and RSR. The findings demonstrated a robust correlation between observed and simulated streamflow during both the calibration and validation stages. The statistical analysis revealed that there was significant agreement between the observed and simulated streamflow in terms of R2 (0.79, 0.75), NSE (0.74, 0.72), PBIAS (−2.8, 2.1), and RSR (0.57, 0.56) during calibration and validation. Evapotranspiration was found to account for 64.66% of precipitation loss, while surface runoff, groundwater flow, and water yield were each responsible for 12.62%, 9.47%, and 32.28% of the annual water balance, respectively. A yearly water balance analysis revealed that evapotranspiration was the primary route of precipitation loss, followed by surface runoff, groundwater movement, and overall water yield. The study estimated the total water potential of the watershed to be 2.45 BMC. Notable spatial heterogeneity in water balance components was observed across subwatersheds, attributable to variations in pedological characteristics, land use/land cover patterns, topographical features, and precipitation distribution. The elucidated hydrological processes provide a robust empirical framework for water resource practitioners and policymakers to formulate and implement evidence‐based, sustainable management strategies.
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