For Ethiopia, the Grand Renaissance Dam (GERD) is a national project of historic scale and a rare unifying symbol in a country torn apart by ongoing internal conflicts.

Towering 145 metres high and stretching nearly two kilometres across the Blue Nile near the Sudanese border, the $4 billion megastructure is designed to hold 74 billion cubic metres of water and generate 5,000 megawatts of electricity -- more than double Ethiopia's current capacity.

The festivities began late Monday with a dazzling display of lanterns, lasers and drones writing slogans like "geopolitical rise" and "a leap into the future", watched by Prime Minister Abiy Ahmed who has made the project a cornerstone of his rule.

Some 45 percent of Ethiopia's 130 million people lack electricity, according to World Bank data, and frequent blackouts in Addis Ababa force businesses and households to rely on generators.

Analysts argue the GERD, under construction since 2011, could transform Ethiopia's economy, boosting industrial production, enabling a shift toward electric vehicles, and supplying power-hungry neighbours through regional interconnectors that stretch as far as Tanzania.

But neighbouring Egypt, dependent on the Nile for 97 percent of its water, sees a looming disaster.

With a population of 110 million and little rainfall, Egypt's reliance on the river is absolute.

President Abdel Fattah al-Sisi has repeatedly called the dam an "existential threat" and vowed Egypt would take all measures under international law to defend its water security.

"Whoever thinks Egypt will turn a blind eye to its water rights is mistaken," he told reporters last month.

The standoff has sharpened regional rivalries. Egypt has strengthened ties with Eritrea and Somalia -- both of which have tense relations with Ethiopia -- and coordinates closely with Sudan, which also worries about reduced flows.

Attempts at mediation by the US, World Bank, Russia, the UAE, and the African Union have all faltered over the past decade.

"For the Egyptian leadership, GERD is not just about water, it is about national security. A major drop in water supply threatens Egypt's internal stability. The stakes are economic, political and deeply social," said Mohamed Mohey el-Deen, formerly part of Egypt's team assessing GERD's impact.

The tensions have not been all bad for Ethiopia's government.

"Ethiopia is located in a rough neighbourhood and with growing domestic political fragility, the government seeks to use the dam and confrontation with neighbours as a unifying strategy," said Alex Vines, of the European Council on Foreign Relations.