Having a robust drought monitoring system for Ethiopia is crucial to mitigate the adverse impacts of droughts. Yet, such monitoring system still lacks in Ethiopia, and in the Upper Blue Nile (UBN) basin in particular. Several drought indices exist to monitor drought, however, these indices are unable, individually, to provide concise information on the occurrence of meteorological, agricultural and hydrological droughts. A combined drought index (CDI) using several meteorological, agricultural and hydrological drought indices can indicate the occurrence of all drought types, and can provide information that facilitates the drought management decision-making process. This thesis proposes an impact-based combined drought index (CDI) and a regression prediction model of crop yield anomalies for the UBN basin. The impact-based CDI is defined as a drought index that optimally combines the information embedded in other drought indices for monitoring a certain impact of drought, i.e. crop yield for the UBN. The developed CDI and the regression model have shown to be effective in indicating historic drought events in UBN basin. The impact-based CDI could potentially be used in the future development of drought monitoring in the UBN basin and support decision making in order to mitigate adverse drought impacts.