The objective of this study was to evaluate the performance of satellite rainfall estimates (Climate Hazards Group Infrared Precipitation with Stations version 2 (CHIRPSv2) and Multi-Source Weighted-Ensemble Precipitation version 2 (MSWEPv2) from 1981 to 2018 for monthly meteorological drought analysis over the Upper Blue Nile (UBN) basin. The reference for the performance evaluation was rainfall measured in situ selected with reference to the elevation zones of the basin: Highland, midland, and lowland. Both the measured and estimated rainfall datasets were aggregated by month at a spatial resolution of 10 km × 10 km with a temporal coverage of 38 years from 1981 to 2018 and evaluated with respect to raw precipitation statistics and the standardized precipitation index (SPI). The values of SPI were validated with reference to documented meteorological drought records of the country. The mean bias, correlation coefficient, probability of bias (PBias, %), mean error (ME, mm), and root mean square error (RMSE, mm) values across the elevation zones for CHIRPSv2 were found to be 1.07, 0.91, 6.75, 7.74, and 122.34, respectively. The corresponding values were 1.19, 0.87, 18.56, 19.54, and 130.26 for MSWEPv2. Based on this result, CHIRPSv2 was employed to analyze the magnitude of drought in the different elevation zones of the UBN. The magnitude (SPI) of monthly meteorological drought over the entire UBN basin from 1981 to 2018 ranged from 0 to −3.74. The strongest negative SPI value (−3.74) was observed in August 1984 in midland areas. The highest magnitude of drought was −3.0 in July 2015 over the highland and −3.03 in June 2015 over the lowland during 2014–2017. The observed drought was characterized by extreme, severe, and moderate levels. The mean frequency of severe/extreme meteorological drought in the 38-year period over the highland, midland, and lowland parts of the UBN ranged from 7% to 11%. The average of severe/extreme drought events in each of the elevation zones of the basin was 9%, that is, drought occurred almost every 10 years for all elevation zones of the basin. Over the 38-year period, severe/extreme drought occurred at the onset and/or offset time of rainy season over all elevation zones of the basin. The UBN is characterized as a drought-prone basin. However, the frequency and magnitude of drought could neither be described as a decreasing nor as an increasing linear trend. Thus, the farming practices in the basin need to be enhanced with an improved early warning system and drought-resistant seed technologies.