The Edinburgh festival fringe has launched a £7.5m emergency appeal after it lost millions of pounds during the Covid pandemic.

The festival’s directors said the crisis had had a devastating impact on the event, which until last year was the world’s largest annual arts festival. It was entirely shut down in 2020 and this year has operated at a fifth of its normal size.

“The last 18 months have been the most challenging in the fringe’s history, and everyone – from artists and venues to the Fringe Society – has experienced huge losses,” said Shona McCarthy, the event’s chief executive.

“[But] 2021’s scaled-back event only happened because of emergency grants, and in many cases, loans that now need to be repaid. We want to ensure the fringe that returns reflects the world we live in – not just those who can afford to keep going.”

The main Edinburgh festivals – the fringe, the international festival and the book festival – have staged significantly pared-down programmes this month, offering a fraction of the normal number of productions, often at new open-air venues.

They have relied heavily on presenting events online, mixing live shows with digital productions to reach audiences prevented from getting to Edinburgh, with in-person audiences heavily reduced owing to social distancing rules.

As a result, the fringe says it faces a far greater challenge adapting to a post-Covid world than its counterparts.

Unlike the international and book festivals, which are smaller and entirely curated by their directors, the fringe is a heavily decentralised festival which relies on autonomous production companies, freelance performers and producers putting on shows in independent venues.

While that increases its artistic diversity, it also presents greater organisational, financial and technical challenges for the fringe to become a viable hybrid live and digital event.

Many performers rely heavily on the fringe for income and to showcase work to other festivals and producers. With this year’s festival due to end on 30 August, so far it has sold only 12,500 digital performance tickets.

McCarthy said she believed the fringe’s global fame would allow it to expand online in future years and digital performances could also help reduce its carbon footprint. “This is a real opportunity to highlight the founding principle of the Edinburgh fringe, which is to be open and accessible, to literally open it to the world,” she said.

The fringe said the appeal, launched on Tuesday with a pledge of £150,000 from the spirits company Edinburgh Gin and a further £160,000 from other donors, would be devoted in part to supporting its artists and venues; investing in its digital and streaming productions; increasing the event’s economic and artistic sustainability; and finding a new permanent home for the Fringe Society, its ruling body, to help promote performance artists.

The funding from Edinburgh Gin is expected to come from profits generated by a new promotional tie-up with the Fleabag creator and actor Phoebe Waller-Bridge, the fringe’s honorary president. Waller-Bridge has designed a limited-edition gin label.

Benny Higgins, a former banker who is the Fringe Society’s chair, said the event was one of Scotland’s greatest cultural exports yet it received little public funding.

“An estimated £20m was lost in 2020 alone,” he said. “To make 2021 a reality, many operators relied on loans and emergency grants. This is not sustainable, and this campaign is about undoing some of that damage, while building a more affordable and equitable fringe. This campaign will give us a foundation to do just that.”