Drywall – use spackling paste to “rebuild” part of the wall

1. Remove high spots by hand sanding the entire wall with a flat, rigid 1/2-sheet sanding block and 80 grit paper. It's ok to remove too much, but stop wherever you start to see the sheet rock facing paper or joint tape. Ideally, 100% of the wall will have been sanded.

2. For the areas (if any) where the paper shows before all the ridges (as in your photo) are gone, switch to either a 1/3-sheet or 1/4-sheet flat and rigid sanding block with 100 grit and sand broadly over the areas surrounding the show-throughs.

3. Remove the dust by wiping down the wall with a damp cloth/sponge kept clean by frequent rinsing in a large bucket.

4. Apply a thin coat of spackle using a 10" or larger metal blade. Apply less than required.

5. When dry, shave off any specs etc using the 10" blade over the entire wall.

6. Use a damp 4"x6"x2" sponge to 'sand' the new spackle, working the sponge from the middle of a patch of spackle outwards towards the edge and beyond.

7. Apply a second thin coat of spackle and repeat the shave/sponge steps.

8. Inspect for flaws using a bright flashlight or trouble-light held against the wall with the room lights turned off.

9. Touch up as necessary.

The best thing you could do is to put ceramic tiles but since that's not what you want let’s try to think of something else. Firstly you must replace damaged drywall. It is extra sensitive when it comes to moisture or water. You can, and should replace it with moisture resistant drywall which is normally used in bathrooms. Then you should apply some waterproofing layer; something cement based (something like Sikalastic-200 W).But thing that is worrying me is do you have horizontal waterproofing layer (waterproofing on your floor? I'm asking this because horizontal and vertical waterproofing layer should be continuous. Than you can pain the bathroom with some exterior (façade) material which is impermeable to water or you can use something like travertine technique which is more expensive but looks really nice and it’s waterproof.