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ADDIS ABABA (Reuters) - Ethiopia's bold decision to pay for a huge dam itself has overturned generations of Egyptian control over the Nile's waters, and may help transform one of the world's poorest countries into a regional hydropower hub.

By spurning an offer from Cairo for help financing the project, Addis Ababa has ensured it controls the construction of the Renaissance Dam on a Nile tributary. The electricity it will generate - enough to power a giant rich-world city like New York - can be exported across a power-hungry region.

But the decision to fund the huge project itself also carries the risk of stifling private sector investment and restricting economic growth, and may jeopardize Ethiopia's dream of becoming a middle income country by 2025.

The dam is now a quarter built and Ethiopia says it will start producing its first 750 megawatts of electricity by the end of this year. In the sandy floor of the Guba valley, near the Sudanese border, engineers are laying compacted concrete to the foundations of the barrage that will tower 145 meters high and whose turbines will throw out 6,000 megawatts - more than any other hydropower project in Africa.

So far, Ethiopia has paid 27 billion birr ($1.5 billion) out of a total projected cost of 77 billion birr for the dam, which will create a lake 246 km (153 miles) long.

It is the biggest part of a massive program of public spending on power, roads and railways in one of Africa's fastest growing economies. Ethiopia's output has risen at near double digit rates for a decade, luring investors from Sweden to China.

But economists warn that squeezing the private sector to pay for the public infrastructure could hurt future prospects. Growth is already showing signs of slowing.

Even so, Addis Ababa says the price is worth paying to guarantee Egypt has no veto over the dam, the centerpiece of a 25-year project to profit from East Africa's accelerating economic growth by exporting electricity across the region.

"We did not want this dam to suffer from external pressures, particularly with respect to financing," said Fekahmed Negash, a director within Ethiopia's Ministry of Water and Energy.


Ethiopia's transformation from an economic disaster barely able to feed its people into an emerging regional leader capable of self-financing mega-projects has recast diplomacy over the Nile, northeast Africa's most important resource.

Egypt, which has claimed exclusive right to control the river's waters for generations, is fuming. Cairo worries the dam will reduce the flow on which it has depended for drinking water and irrigation for thousands of years.

It has demanded building be halted pending negotiations between the countries, and had offered to take on joint ownership of the project, an offer Addis Ababa dismissed.

Cairo no longer wields the same leverage it once did when upriver sub-Saharan countries were too poor to build such huge projects themselves.

Still, the dam's cost of more than $4 billion is roughly 12 percent of the annual output of Ethiopia, a steep price to pay for a country spurning outside help.

Ethiopia has resorted to measures like forcing banks that lend to private borrowers to lend the equivalent of 27 percent of their loan books to the government at a low return, effectively a tax on private lending.

Along with other projects, the dam is draining so much financing from the economy that private investors' access to credit and foreign exchange is being jeopardized, hurting growth, the International Monetary Fund says.

The IMF forecast in November that output growth would slow to 7.5 percent this fiscal year from 8.5 percent in 2011/12, and said the economy needed restructuring to encourage private sector investment now crowded out by huge public projects.

Ethiopia needs high growth to fulfill plans to lift its population out of deep poverty. Per capita income was still just $410 in 2012, the World Bank says.