The diversity of vegetation in semi-arid, ephemeral wetlands is determined by niche availability and species competition, both of which are influenced by changes in water availability and salinity. Here, we hypothesise that ignoring physiological differences and competition between species when managing wetland hydrologic regimes can lead to a decrease in vegetation diversity, even when the overall wetland carrying capacity is improved. Using an ecohydrological model capable of resolving water-vegetation-salt feedbacks, we investigate why water surface and groundwater management interventions to combat vegetation decline have been more beneficial to Casuarina obesa than to Melaleuca strobophylla, the co-dominant tree species in Lake Toolibin, a salt-affected wetland in Western Australia. The simulations reveal that in trying to reduce the negative effect of salinity, the management interventions have created an environment favouring C. obesa by intensifying the climate-induced trend that the wetland has been experiencing of lower water availability and higher root-zone salinity. By testing alternative scenarios, we show that interventions that improve M. strobophylla biomass are possible by promoting hydrologic conditions that are less specific to the niche requirements of C. obesa. Modelling uncertainties were explored via a Markov Chain Monte Carlo (MCMC) algorithm. Overall, the study demonstrates the importance of including species differentiation and competition in ecohydrological models that form the basis for wetland management.